Balance Sheet Decoded

The balance sheet is a financial statement that describes what the firm is worth at any one point in time. Balance sheet is more like a snapshot of the financial position of a company at a specified time, usually calculated after every quarter, six months or one year. A typical company balance sheet consists of the three sections; assets, liabilities and owner’s equity or capital.

Often described as a “snapshot of a company’s financial condition”, it is the only financial statement which applies to a single point in time. It is crucial that all potential investors know how to read, use, and analyze this document. The accounts of the balance sheet do not show results, but net values. Balance Sheet is the financial statement of a company which includes assets, liabilities, equity capital, total debt, etc. at a point in time. 

How the balance sheet ‘balances’

This report is based on the most basic accounting principle that net worth (shareholder’s/ Owner’s equity) must equal assets minus liabilities.

The statement is divided into two parts, 1) assets and 2) Liabilities & owner’s equity.

The two sides of the balance sheet must equal, which makes sense: a company has to pay for all the things it has (assets) by either borrowing money (liabilities) or getting it from shareholder’s (owner’s equity).

That is, the Balance sheet includes assets on one side, and liabilities on the other. For the balance sheet to reflect the true picture, both heads (liabilities & assets) should tally (Assets = Liabilities + Equity). 

Let’s understand each one of them:

Assets: An asset is anything of value (resources or things) that a company owns. This includes cash, property and equipment, inventory, accounts receivables and more. An asset is something that can be converted to cash value.

In the balance sheet, the total value of assets represents an important part of the equation. Assets are an indication of a company’s holdings and contribute to overall value.

Assets can be divided into current as well as non-current assets or long term assets.

Liabilities: A liability is an amount (debts or obligations) that a company owes. Typically, a liability involves money borrowed in order to support business activities, so can also include accounts payable and general debt.

In the balance sheet, the total liabilities is the total money owed, whether to a lender, bank, or supplier. In relation to the assets, it provides an idea of how stable a business is, as well as whether accounts are overdue.

Liabilities are the amount that the company owes to its creditors. Liabilities can be divided into current liabilities and long-term liabilities.

Owner’s Equity: Another important head in the balance sheet is shareholder or owner’s equity. It is the assets minus the liabilities. Any remaining value in assets can be attributed to owner’s equity.

Assets are equal to total liabilities and owners’ equity. Owner’s equity is used when the company is a sole proprietorship and shareholders’ equity is used when the company is a corporation. It is also known as book value of the company.

In any typical balance sheet, the total assets of company should be equal to the total liabilities of the company. Hence,

Assets = Liabilities

The equation above is called the balance sheet equation or the accounting equation. In fact this equation depicts the key property of the balance sheet i.e the balance sheet should always be balanced. In other word the Assets of the company should be equal to the Liabilities of the company. This is because everything that a company owns (Assets) has to be purchased either from either the owner’s capital or liabilities.

Owners Capital is the difference between the Assets and Liabilities. It is also called the ‘Shareholders Equity’ or the ‘Net worth’. Representing this in the form of an equation :

Share holders equity = Assets – Liabilities

As we know the balance sheet has two main sections i.e. the assets and the liabilities. The liabilities as you know represent the obligation of the company. The shareholders’ fund, which is integral to the liabilities side of the balance sheet, is highlighted in the snapshot below. Many people find this term a little confusing.

If you think about it, on one hand we are discussing about liabilities which represent the obligation of the company, and on the other hand we are discussing the shareholders’ fund which represents the shareholders’ wealth. This is quite counter intuitive isn’t it? How can liabilities and shareholders’ funds appear on the ‘Liabilities’ side of balance sheet? After all the shareholders funds represents the funds belonging to its shareholders’ which in the true sense is an asset and not really a liability.

To make sense of this, you should change the perceptive in which you look at a company’s financial statement. Think about the entire company as an individual, whose sole job is run its core operation and to create wealth to its shareholders’. By thinking this way, you are in fact separating out the shareholders’ (which also includes its promoters) and the company. With this new perspective, now think about the financial statement. You will appreciate that, the financial statements is a statement published by the company (which is an entity on its own) to communicate to the world about its financial well being.

This also means the shareholders’ funds do not belong to the company as it rightfully belongs to the company’s shareholders’. Hence from the company’s perspective the shareholders’ funds are an obligation payable to shareholders’. Hence this is shown on the liabilities side of the balance sheet.

Let’s understand reporting of a transaction on a balance sheet. If a company ABC takes a five-year loan from public sector banks for an amount of Rs 1,00,000, it means that the bank will pay the money to ABC Ltd.

The accounts department will increase the cash component by 1,00,000 on the assets front, and at the same time increase the long-term debt account with the same amount, thus balancing both the sides.
If company raises Rs 10,00,000 from investors, then its assets will increase by that amount, as will its shareholder’s equity.

The balance sheet, along with the income and cash flow statement, is an important tool for owners but also for investors because it is used to gain insight into a company and its financial operations.

It is important that investors understand how to use, analyse, and read the document.

Why the balance sheet is important

Questions about liquidity and efficiency are two of the more common aspects of a business revealed in the balance sheet.

Liquidity: liquidity is generally more thoroughly measured by applying one or more ratios to produce a percentage that can easily be compared against previous, future, and market percentages. The ratios most commonly used are the current ratio and the quick ratio.

Efficiency: efficiency seems fairly straightforward as it involves how well a business is managing its assets including working capital. This provides a better idea of the financial efficiency on a day-to-day basis for the given time period.

The balance sheet can also provide insight into a business's leverage, which can illustrate the amount of risk being taken, as well as the returns, such as returns on investment (ROI).

Understanding a balance sheet

While it may seem intimidating for those unfamiliar with accounting practices, the balance sheet is easily interpreted, especially for small businesses that have fewer entries as compared to a large corporation, for example.

While one balance sheet on its own only provides information about the period selected, it can be useful to compare it to balance sheets from previous periods as well as calculate ratios mentioned above to compare across these financial periods. In addition, it can be compared with other businesses in order to gain an understanding of how a business stands in a particular industry.

Balance sheet and Debtor

Thankfully, modern invoicing and accounting software makes balancing your assets, liabilities and owner’s equity a bit easier. With Debtor, you can view your balance sheet, which automatically updates when you enter new details, at any given time and select the time frame.

No longer do you need to spend time painstakingly combing through a spreadsheet. The balance sheet gathers and provides the information regarding your accounts. All you need to do is keep them up to date!

Net profits (PAT) can be misleading!

Every inexperienced investor will just look at the main financial ratios & even the profit after tax (PAT) which is other wise called the net profit & then call it an analysis & invests in that particular stock. But this can be misleading (though not necessarily). The catch is that there can be many companies which brew the profits or profit margins from non core operations though their operational profits are suffering. This is a big red flag!

We need to analyse a company for its actual & steady profitability which will be for their core operations. Higher PAT, say for a year, with that company making losses at its operational levels is not desirable. Operational profits are generated from the main operations of the company by selling it's products or rendering services, which reflects the core business strength of that company depicting it's growth potential. The non operational income which other wise is named as "other income" (in the profit & loss statement) on  the other hand includes revenue from rent, interest, dividends, foreign exchange gains etc.. For some companies the non operational income is temporary. A gradual shrinkage in the operational income indicates the products of the company are no longer having it a shine or competitive advantages, so keep a watch on this while picking a so called profitable company/ stock!

What are Exchange Traded Funds (ETF)?

Exchange  Traded  Funds  have been  of  great  interest  in  the recent  years.  They  provide  a  low cost  and  rule  based  investment opportunity  in  the  markets.  In simple  terms,  ETFs  are  mutual funds  that  trade  on  a  stock exchange.  While  ETFs  share  a few  similar  traits  with  mutual funds;  it  is  their  resemblance  to stocks  that  has  gained  traction among investors. They represent a  basket  of  securities  that  tracks indices  such  as  Sensex  or  Nifty, much  like  index  mutual  funds. ETFs  experience  price fluctuation  throughout  the  day. This  flexibility  of  trading  proves beneficial  to  exit  and  enter  at  a defined  price.  In  addition  ETFs  are  rule  based  which  ensures  that the  strategy  of  investment  is  well  known  in  advance.  Most  ETFS track  an  index and do not aim at beating the index. Indian ETF industry has come a long way since its foundation in 2001. This  is  propelled  by  the  success  of  Gold  and  CPSE  ETFs  amongst retail  investors  and  channeling  of  part  of  employee  provident funds  into  markets  by  the  EPFO.    As  per  a  Bloomberg  report  in 2017, India was world's second-fastest growing exchange traded funds (ETF) market, behind only Japan. The  ETF  industry  is  still  at  a  nascent  stage  in  India.  This  is partially  due  to  lack  of  knowledge  about  the  product.

Globally, specifically  in  the  US,  the  interest  in  ETFs  has  grown  many  times, given  its  success  in  returns,  innovations  and  availability  of  diverse underlying  assets.  In  order  to  attain  similar  market  outcome  in India,  we  need  a  large  number  of  participation  by  Indian  investors and  more  importantly,  awareness  about  ETFs.  An  understanding how  ETFs  differ  from  their  conventional  counterparts  and  their role  in  our  portfolio  is  important. ETFs  are  more  cost-effective  than  traditional  mutual  funds  given that  they  are  managed passively.    Tracking error  is  another  gain  for ETFs  over  conventional  index  funds.  Tracking  error  is  the difference  between  returns  of  the  fund  (ETF  or  index)  and  the returns  generated by target index. Then  there  are  advantages  of  getting  listed  on  stock  exchange. Since  ETFs  are  traded  like  stocks  investors  enjoy  benefits  of  short selling  and  buying  on  margin.  Plus,  ETFs  make  a  potential  tool  for gaining  instant  exposure  to  the  security  markets  through  cash equitization.  In  some  cases,  investing  in  ETFs  can  be  wiser  than single  stock  investments.  This  is  because  ETF  spreads  its  risk across  different  assets  instead  of  focusing  on  specific  firm's  stock. This  can  help  mitigate  losses  occurred  during  downtrend  of  the market Exchange-traded  funds  are  very  powerful  instruments  to  diversify ones  investing  strategies.    A  combination  of  active  and  passive management  can  effectively  harness  the  result  by  using  each strategy  to  minimize  risks  caused  by  the  other.  ETFS  are  also suited  for  new  to  market investors especially  through  a Systematic Equity Plan.

ETFs  try  to  mimic  the performance  of  indices.  These  indices  can  be  a  simple  market-cap  index (like Nifty  or  Sensex)  or  a  factor  index.  Because  indices  are  rule  based,  investing in  ETFs  are  cost  effective  and  transparent  with  respect  to  the  investment strategy.  ETFs  can  be  purchased  on  exchange  on  real  time  price  that  changes depending  on  the  demand  and  supply  in  the  market.

Spend only what is required to be spent!

The 7 Important Investing Key Notes

Note #1: Ability to buy stocks while others are panicking and sell stocks while others are euphoric
Buy low and sell high. But most people do the opposite as they base their decisions on emotions and fear of missing out.

Note #2: Be obsessive about playing the game
One either have too much money or too much time. Rarely do you have a lot of both. And unless your job is being a fund manager where your time is to invest money, the majority of us are stuck in one of the two.
But if you are obsessed about something, like your job, hobby, toy or whatever, at least you have put in the time to know the ins and outs of it all. Just expand on it a little to find investments related to it.
So rather than trying to study every stock I come across, like I used to when I had lots of time and no money, I’ve focused betting on areas I am obsessed and confident in.

Note #3: willingness to learn from past mistakes.
Note this:
1. Don’t over-analyze our past mistakes
2. Be less harsh on ourself
The truth is that you are going to make mistakes no matter what.
The better rule is to make sure you don’t make the same mistake rather than trying to learn everything from your mistakes and paralyzing yourself.

Note #4: inherent sense of risk based on common sense.
Don’t blindly trust what media, computers, spreadsheets tell you, Use your common sense
Diversify to reduce risk if you have to. Don’t put 100% of your money on a coin flip investment. If something looks too good to be true, it probably is.

Note #5: Great investors have confidence in their own convictions and stick with them, even when facing criticism
I don’t care whether I’m wrong. The goal is to profit and build wealth. If I’m right along the way, awesome. But I don’t need to be 100% correct. Even if I have a low hit rate, with proper allocations, it will yield excellent returns.
If you invest in 10 companies where 9 of them are duds which you sell quickly, but you have one huge winner, your hit rate is 10%, yet your investment returns will be thanking you.
Don’t be afraid to call it a loss and move on to the next idea. See above notes #1 and #3.

Note #6: have both sides of your brain working
“As an investor, you need to perform calculations and have a logical investment thesis. This is your left brain working. But you also need to be able to do things such as judging a management team from subtle cues they give off. You need to be able to step back and take a big picture view of certain situations rather than analyzing them to death.”
Every valuation and assumption must include a story. Outside of buying cigar butts, there has to be an underlying thesis to match the valuation.
• Think sales are going to go down as a patent is expiring and competitors will dilute the marketplace? Short the patent holder or buy the competitors.
• Believe electric and self-driving cars will ruin insurance companies? Short insurance or buy car manufacturers.
• Read that the city that claims Amazon’s 2nd HQ will pump huge amounts of money into building infrastructure? Buy Amazon or municipal bonds.
Discover the story that you think will unfold. Sometimes I’ll get a comment about investing or updating my thesis with anecdotal evidence, but if you’ve got extensive experience in a certain field, this anecdotal evidence is the difference maker.

Most Important Note #7: The ability to live through volatility without changing your investment thought process.
Sellers is talking about not giving up on your process because the market takes a dive or handling volatility. Zoom out and look at the big picture.
The Great Depression or the market slide years back, I don’t know how people would have handled that type of treacherous market that wiped out most investors. Likely, most would have kept averaging down, down…. all the way to nothing.
But in the end, the market recovered and the rest is history. The market has always come back.
Don’t panic & maintain the integrity & intelligence.

6 tips for a fresher to start investing in stocks

Equity Trading is not a game. When you start reading and learning about it, you will see that it is a profession in itself. Before investing, an individual needs to know a few basics and risks associated with it. This has to be done before you start to trade on real time stock markets.

This requirement of knowledge about stocks and stock markets make it seem like a daunting task for beginners. Here are 6 tips to give you a better idea about stock markets and get you started on this investment journey:

Don’t Invest Your Savings: Stock markets are known to be high-risk investments where there is no guarantee of receiving your principal investment back. Hence, it is wise to not get sucked into the lure of higher returns. It is advised to invest in the stock market only once you have other savings that are more secure. Having fairly secured your future, you can then afford risks and make a move towards the stock market.

Maintain Investment Discipline: Fluctuations in prices are nothing new within the stock market. This volatility in the market has sometimes caused the investor lose their money. Also, timing the market in such conditions becomes a tough task. To avoid losing your money can have adopt a disciplined approach towards investing. Systematic Investment Plans (SIPs) are one way of doing so. When you have discipline and patience in monitoring your portfolio, chances of generating great returns become brighter.

Manage Risk & Money Wisely: As an Investor, you cannot control the market but surely you can manage their money in every transactionyou make. Even if you have a good trading strategy it can be all for nothing. You need to have money left in your investment as well. One of the best technique of managing your invested money is by using thestop loss tool.
When the threshold value of your investment reaches between 5-15% the stop loss tool will automatically trigger an order. This order will release the investment and avoid further loss.

Hold Diversified Portfolio: The stock market is filled with companies from various sectors and fields offering many services. Diversify your stocks into different industries. This way if one industry of your investment is down performing, another might shoot up. You should focus on stocks of reputed companies that offer more guaranteed returns. However, keep a few stocks of newer companies that you trust to grow. This way you can maximise your profits with their future growth.

Keep a Long-Term Goal: Stock markets are volatile in the short term but over the long term period they are less risky and offer better overall returns. Holding stocks for a longer time period is more likely to get you great returns. Hence, it is better to invest in stocks with a long term view rather than a short term one. It is a good idea to lock in money which you won’t be needing in the near future. This way if you sell the stocks when the prices are down you may lose money at the start but over the years the stocks tend to catch up.

Remember a Stock is a Company: No matter whether you earn or lose it is important to remember the basic idea behind this investment.You are investing in a company that you trust and hope will grow in future. Hence, do not get caughtthinking of stocks as a game or gamble. Your money is invested in a real company, where real work has to be done for your investment to grow.It is, therefore, important for you to find out all you can about the company and find a right estimate of its future potential. You should also consider whether these goals align with your own investment goals.

The Warren Buffet Way!!

Contrarian Investing

The Philosophy:
          It goes against human nature to stand out of the crowd! Contrarian investing is one of the oldest way of investing strategy. Warren Buffet is one of the famous Contrarian investors who sternly believes in buying when others are selling (out of fear) and selling when others are greedly buying! Contrarian investors like value investors attempt to identify investment opportunities that are not on the investment radar of majority of the investors. Contrarian investors always seeks financially solid companies that are temporarily out of favour in the market & are priced low when compared to its earnings. Contrarian investors are independent thinkers & chooses not to follow the crowd. A true Contrarian investors defines value differently & believes that the real value is at the extreme - low P/E, low P/B, low P/Cash flow and high dividend yields. Contrarian investors has to show high levels of patience as his Contrarian bets may take extended periods of time & this is because the market may not recognise the intrinsic value of the undervalued securities for years together!
Contrarian investors will at least have a investment horizon of 3 years for a bet he picks. The exact period after which the market will realize his stock pick is not predictable. Contrarian investing is very challenging & should have in-depth knowledge of how market functions. Contrarian investors understands the investor psychology & realistic market cycles. His course of actions are many a times against what normal investors think of. Contrarian investors should have a mind set like none other. If successful, they end up with multibagger opportunities.

They focus on bets which are nearing their inflection point, means they identify opportunities before others do. Many think that such investors buy stocks which are falling & keep buying as they fall. This is a misconception! In fact they are very cautious & avoids falling knives. Normally the return on investment is very high for Contrarian investors.

Normal investors sell the securities once that company is hit with a negative news. Overreaction to news is common for equity market. But Contrarian investors concentrates on other positive aspects of the company which on overall basis turns out to appreciate the stock price in long run. The negative news helps under value the stock for Contrarian investors to pick it at the right price & sell it when the stock appreciates over the time. Patience is the key as always!

Market analysts & normal investors tend to discover those stocks or securities which are already shot up in price in the market. Contrarian investors catches thet young unlike others.

Contrarian investing works under following major assumptions:
(1) The company is fundamentally strong, but external & economic factors are responsible for its underperformance.
(2) The sector or company has seen a down turn & that there is limited further downside.
(3) The company has the potential to bounce back sharply when the cycle turn around.
(4) The management of the company has done the turn around in the past and can do it again,


Risks of Contrarian investing:
Loss of capital is a major risk, as all Contrarian investing may not pass through. But as always diversification is the key to limit the losses rather than to bank on one or two Contrarian bets. If the market does not behave as the Contrarian investor anticipated a huge capital loss can occur.

Hence Contrarian investing is not for light hearted investors..

Risk Management Strategy

In Investing as per me, a risk can never be cent percent eliminated, but only be mitigated to the maximum extend possible, there lies our success!

Listed below are the major risk mitigation strategies which we can adopt as a part of Risk Management while investing.

(1) For any trade don't risk more than 5% of your total capital.

(2) Maintain a clear cut exit plan for the trade you do.

(3) Large profit expectation implies larger risk, so be minimal in return expectations so that you limit down sides.

(4) Don't be a trader as I alway say, margin calls can bust up your hard earned money, be a long term patient seasoned "investor".

(5) Liquidate your underperforming assets & stay long with performing ones, don't worry about the losses you book, since your performing assets will cover your losses & fetch you decent profits, rather than sinking along with the ship!

(6) Do your homework well before you invest, don't just invest for sake of it, take longer time to study all the aspects of the stock/ investment you are entering into. Be 100% confident.

(7) Do not time the market, we will not be able to snatch all the market peaks, so be realistic & a patient investor.

(8) Do not take positions or investment burdens which your income cannot support. Also very importantly don't invest with leverage (don't borrow money for investing).

(9) Have a contingency plan, if some of your investment strategy fails to meet a goal, have back up plan to support the situation so that you don't fall short of money for your goal.

Steps to Avoid Repeating Investment Mistakes

-Identify the Mistake

-Identify Reasons for the mistake

-Focus on Corrective Actions

Market Cycle Curve

Is a Company doing Righteous Acquisition?

As a shareholder, you do well to place more emphasis on risk than on reward. Corporate management usually does the opposite, and this is why most large acquisitions fail.

Infact, I assume from the start that an acquisition will fail — or at least will turn out not nearly as profitable as the picture management paints.

For starters, a buyer typically pays too much. An old Wall Street saying comes to mind: “Price is what you pay; value is what you get.” It all starts with a control premium. When we purchase shares of a stock, we pay a price that is within pennies of the latest trade. When a company is acquired, though, the purchase price is negotiated during long dinners at fine restaurants and comes with a control premium that is higher than the latest stock quotation.

How much higher? Acquisitions have the elements of a zero-sum game. Both buyer and seller need to feel that they are getting a good deal. The seller has to convince the company’ s board and its shareholders that the sale price is high (unfairly good). The buyer in turn needs to convince his constituents that they are getting a bargain. Remember, both are talking about the same asset.

This is where a magic word — which must have been invented by Wall Street banks’ research labs — comes into play: “synergy.” The only way this acquisitions dance can work is if the buyer convinces his constituents that combining the two companies will create additional revenues otherwise not available, and/or it will eliminate redundant costs. Thus, the sum of synergies will turn the purchase price into a bargain.

If you examine why General Electric Co., for example, has been a subpar investment over the last two decades, you’ll find that it’s because of poor capital allocation. The company lost a lot of value in making destructive acquisitions — buying businesses at high prices, relying on false or unfulfilled synergies, and selling (divesting) at reasonable (or low) prices.

There are also a lot of “dis-synergies” (a term you’ll never see in an acquisition press release). The two corporate cultures may simply be incompatible. One company may have a strong founder-led culture, while in the other company decisions are made by consensus. Cultural incompatibilities only get worse when the buyer and seller are not engaged in the same business.

A case in point: Silicon Valley pioneer HP Inc. has been substantially gutted by large acquisitions. When the company acquired Compaq in 2002, HP’s unique engineering culture did not mix well with Compaq’s manufacturing culture. The same happened with EDS (acquired in 2008), which had a service culture, and again with Autonomy (in 2011) — a software company that ended up being a bag of bad goods (it used questionable accounting and overstated its sales). Each of these acquisitions severely damaged HP’s unique culture, and all were reversed through various spinoffs in recent years.

Five Stages of a Bubble

(1) Displacement: A displacement occurs when investors get hooked by a new paradigm, such as an innovative new technology or interest rates that are historically low. A classic example of displacement is the decline in the federal funds rate from 6.5% in May 2000, to 1% in June 2003 in US. Over this three-year period, the interest rate on 30-year fixed-rate mortgages fell by 2.5 percentage points to a historic low of 5.21%, sowing the seeds for the housing bubble.

(2) Boom: Prices rise slowly at first, following a displacement, but then gain momentum as more and more participants enter the market, setting the stage for the boom phase. During this phase, the asset in question attracts widespread media coverage. Fear of missing out on what could be a once-in-a-lifetime opportunity spurs more speculation, drawing an increasing number of participants into the fold.

(3) Euphoria: During this phase, caution is thrown to the wind, as asset prices skyrocket. The "greater fool" theory plays out everywhere. Valuations reach extreme levels during this phase. For example, at the peak of the Japanese real estate bubble in 1989, land in Tokyo sold for as much as $139,000 per square foot, or more than 350-times the value of Manhattan property. After the bubble burst, real estate lost approximately 80% of its inflated value, while stock prices declined by 70%. Similarly, at the height of the internet bubble in March 2000, the combined value of all technology stocks on the Nasdaq was higher than the GDP of most nations. During the euphoric phase, new valuation measures and metrics are touted to justify the relentless rise in asset prices.

(4) Profit Taking: By this time, the smart money – heeding the warning signs – is generally selling out positions and taking profits. But estimating the exact time when a bubble is due to collapse can be a difficult exercise and extremely hazardous to one's financial health, because, as John Maynard Keynes put it, "the markets can stay irrational longer than you can stay solvent." Note that it only takes a relatively minor event to prick a bubble, but once it is pricked, the bubble cannot "inflate" again. In August 2007, for example, French bank BNP Paribas halted withdrawals from three investment funds with substantial exposure to U.S. subprime mortgages because it could not value their holdings. While this development initially rattled financial markets, it was brushed aside over the next couple months, as global equity markets reached new highs. In retrospect, this relatively minor event was indeed a warning sign of the turbulent times to come.

(5) Panic: In the panic stage, asset prices reverse course and descend as rapidly as they had ascended. Investors and speculators, faced with margin calls and plunging values of their holdings, now want to liquidate them at any price. As supply overwhelms demand, asset prices slide sharply. One of the most vivid examples of global panic in financial markets occurred in October 2008, weeks after Lehman Brothers declared bankruptcy and Fannie Mae, Freddie Mac and AIG almost collapsed. The S&P 500 plunged almost 17% that month, its ninth-worst monthly performance. In that single month, global equity markets lost a staggering $9.3 trillion of 22% of their combined market capitalization.

What is a Bubble & a Crash?

What is a Bubble?

A bubble is a type of investing phenomenon that demonstrates the most basic type of "emotional investing." A bubble occurs when investors put so much demand on an asset that they drive the price beyond any accurate or rational reflection of its actual worth. In the case of a stock, the actual worth would ideally be determined by the performance of the underlying company. Like the soap bubbles a child likes to blow, investing bubbles often appear as though they will rise forever, but since they are not formed from anything substantial, they eventually pop. And when they do, the money that was invested into them dissipates into the wind. 

The term "bubble," in the financial context, generally refers to a situation where the price for an asset exceeds its fundamental value by a large margin. During a bubble, prices for a financial asset or asset class are highly inflated, bearing little relation to the intrinsic value of the asset. The terms "asset price bubble," "financial bubble" or "speculative bubble" are interchangeable and are often shortened simply to "bubble."

Characteristics of an Economic Bubble
A basic characteristic of bubbles is the suspension of disbelief by most participants during the "bubble phase." There is a failure to recognize that regular market participants and other forms of traders are engaged in a speculative exercise which is not supported by previous valuation techniques. Also, bubbles are usually identified only in retrospect, after the bubble has burst.

In most cases, an asset price bubble is followed by a spectacular crash in the price of the securities in question. In addition, the damage caused by the bursting of a bubble depends on the economic sector/s involved, and whether the extent of participation is widespread or localized. For example, the bursting of the 1980s bubble in Japan led to a prolonged period of stagnation for the Japanese economy. But since the speculation was largely confined to Japan, the damage wrought by the bursting of the bubble did not spread much beyond its shores. On the other hand, the bursting of the U.S. housing bubble triggered record wealth destruction on a global basis in 2008, because most banks and financial institutions in the U.S. and Europe held hundreds of billions of dollars worth of toxic subprime mortgage backed securities. By the first week of January, 2009, the 12 largest financial institutions in the world had lost half of their value. The economic downturn had caused many other businesses in various industries to either go bankrupt or seek financial assistance. 

What is a Crash?

A crash is a significant drop in the total value of a market, almost undoubtedly attributable to the popping of a bubble, creating a situation wherein most investors are trying to flee the market at the same time and consequently incurring massive losses. Attempting to avoid more losses, investors during a stock market crash often resort to panic selling, hoping to unload their declining stocks onto other investors. This panic selling contributes to the declining market, bringing about the eventual crash that affects all the market participants as well as seemingly unrelated aspects of global finance. Typically crashes in the stock market have been followed by a depression.

Cash Conversion Cycle of Stock: Vedanta

Cash Flow Analyis of Listed Stock Vedanta

Negative Cash Conversion Cycle

CCC Vs Profit Margin

Calculating Cash Conversion Cycle

Cash Conversion Cycle

Buffet talk

What is an Economic Moat?

Why steel price rise?

Decoding P/E Ratio

How much Stocks to Hold in your Portfolio?

Evaluating Company Management

Long Term Investing

Peer Comparison

Decoding Free Cash Flow!

When to Sell the Stock-Part2

When to Sell a Stock?

Websites/ Mobile Apps for Stocks

Website Direct Links:

https://www.stockaxis.com/

https://www.moneycontrol.com/

https://www.valueresearchonline.com/

https://economictimes.indiatimes.com/wealth/

A beginner's check of company health

Value Investing

Return on Equity (ROE)