Information for financial planning

Vidhata was not very highly educated. He had completed his 8th standard exams when his father passed away and he began working. However, he always kept in touch with the skills that he had learnt in school – reading, writing and maths!

He used to regularly watch programmes on business channels of television. He also used to business magazines and newspapers from cover to cover. There were plenty of articles and programmes on television that seemed to be just for him. Once Vidhata understood the basics, he moved to reading more advanced articles and watching programmes that were more in- From time to time, he also overheard the conversations of people whom he served at the restaurant. Based on all the inputs he got – from the television, magazines, newspapers and people he met – he used to form his own opinion.

Soon he began putting into use the knowledge that he gathered. While he always give his mother his salary, so she could run the house, he kept his tips. He used to invest part of these in safe financial products at the village post office – such as KVPs, NSC, etc. He also opened a post office savings account. With the remaining money, he decided to invest in shares through a sub-broker – Mr. Dalal - whose office was on the station road. He had learnt that shares are the best way to increase your wealth over the long term. His interest in a particular share could be triggered by any source of information. Irrespective of where he first heard about a stock, he would go to the library to read up about it. If there was not much information available, he would go to his broker’s office after trading hours and request him for print outs of information about the stock. Mr Dalal would take the effort to answer Vidhata’s queries on various. Since he had access to the internet, if he was unsure about the answers to any of Vidhata’s questions, he would do a search on the internet and give Vidhata the background information he was looking for. Only when Vidhata was convinced that a particular company had good future potential (keeping in mind the industry, the economy and the global market at large) and sound financial backing would he invest in it.

His approach paid off. He usually invested in very sound companies. Over a couple of years, the value of the stocks he purchased increased manifold. At the same time, the money that he collected in the post office savings increased too. With a combination of these two sources of information, one by one his goals were met.

Macro information

Macro information, meaning big or overall information, may not seem to be directly related to your investment and budgeting decisions. However, it is very important to keep a track of this information because it will have a great impact on your investments over the long run.

Economic growth in the country

Countries go through economic cycles. This means that there are a few years during which a country will grow at good rate and then it will be followed by a few years of slightly slower growth. If a country is growing well, businesses do well. As a result, stock prices increase. On the other hand, interest rates and inflation remains moderate. When a country is in a down cycle, stock prices are relatively low and interest rates and inflation start to increase. Of course there are many other factors that influence stock prices, inflation and interest rates but keeping a track of economic growth will broadly help you decide which financial products to invest in.

Political issues

When a country enjoys political stability, the economy prospers. Although both growth and social issues are equally important, there are certain political parties that give more importance to the former and others that give more importance to the latter. As a result, the political party in power has an impact on the performance of stocks and other financial products.

Interest rates

In India, the RBI still has a good amount of control on interest rates. It can raise or decrease interest rates in the banking sector. Those rates in turn determine the rates at which businesses borrow and lend to the banking sector and other lending institutions. Usually, when business people want to borrow more money to grow their businesses, interest rates in the market increase. Another important factor that impacts interest rates is inflation. When inflation is high, the RBI may try to keep interest rates high too as has the effect of bringing inflation down, to some extent. There are other factors that affect interest rates too.

Inflation

The rise in prices is broadly referred to as inflation. In India, we use the Wholesale Price Index or WPI to measure inflation. This index considers the average rise or fall in a number of commodities so that it can give us an indication of how prices are moving in the economy. As explained earlier, inflation has an impact on interest rates. It also affects stock prices. If inflation and interest rates are high, businesses are likely to show lower profits and therefore their prices on the stock exchange are likely to fall. The reverse is usually true too.

Global issues

Our economy is affected by many global issues. If prices of oil rise internationally, we face higher fuel prices too. Directly and indirectly this pushes inflation upwards. Also, since money flows between India and the rest of the world in the form of investments, if countries abroad are facing problems, it impacts their investments in India and vice versa. As a result, the fate of the global economy makes our stock markets move up and down and finally could impact businesses. In general, since India trades with a number of countries across the world, the performance of these countries affects the performance of the Indian economy. This effect comes through the prices and amounts of commodities traded

Industry information

When we plan to invest in shares, we must be convinced that the company in which we plan to invest has good growth prospects. We do this by understanding the environment (economy and industry) that the company has to function in.

Growth rates

We must understand how the industry has been growing in the past. It will give us some idea of how we can expect an averagely performing company from that industry to grow.

Prospects

If a company has good growth potential, it usually means that companies from within that industry can expect to grow. To understand the prospects of an industry, we must understand its products. We must be convinced that the demand for these products will grow in the future. All these and other aspects of an industry tell us if it is worth investing in companies that belong to it. We may also look at the global growth prospects of a company, especially if its raw materials of finished goods are imported or exported.

Size and dynamics

We must take a look at the size of the industry in comparison to those in other countries across the world and in comparison to its own size in the past. We must also consider how many companies function in the industry. This gives us an idea of the competition that exists within the industry.

Stock specific information

Management track record

The most important factor behind the success of a company is the management. We must be convinced that the management has good leadership skills and can plan well for the company. We must also be convinced that they are honest people who want the company to grow.

Growth strategy

We must find out how the company plans to grow. Will it be launching new products? Will it be selling its products in new markets? Will it be reducing the price of its products or advertising more? We must be convinced that the company has a sound growth plan.

Financial ratios and figures

There are plenty of articles and books written on financial ratios and other financial figures. We must understand what the main ones signify and what they tell us about the company and its future. This will give us the confidence to invest in it and some benchmark to measure its performance.

Source: Portal Content Team