The Edition
facebook icon twitter icon instagram icon linkedin icon


What investors need to consider while trading

Mohamed Rehan
28 September 2022, MVT 13:50
Slight movements can mean big profits
Mohamed Rehan
28 September 2022, MVT 13:50

Financial literacy in the Maldives remains modestly progressive. Stock market trading activities have picked up gradual increase of investors. Many are jumping into trading securities over their potentialities.

Capital Market Development Authority (CMDA) along with Maldives Stock Exchange (MSE) and market intermediaries are working closely to create easier, open and welcoming platforms for prospective new investors and traders. Trading or long-term investments are detailed and at times complex transactions. The ordinary joe might get intimidated by the onslaught of previously unheard technical jargons, corporate language, and even 'large scary numbers.'

This is where one must ensure they acquire adequate knowledge that will make them adept at this 'previously uncharted' territory. Financial trading can be a make-it or break-it situation; and for most, who are reckless enough to venture into it without acquiring proper education or knowledge, it is more break-it than make-it.

When it comes to understanding the trade market environment; there are several aspects one must factor in - from the corporate health of the company one is investing in to their potential growth going ahead.

So, here are a few important elements an aspiring trader or investor must check out before they lift the curtain to this complex world.

Net Profit Margin

The net profit margin, or the net margin of a company, measures how much net income or profit a company generates as percentage of the revenue. This illustrates how much of the money collected into the company as revenue eventually turns to profit.

Most business analysts identify that a 10 percent or more net profit margin is a sign of good company health. If the net profit margin is high, it usually reflects a company's ability of controlling its expenditure and translating majority of its earnings into profit.

Return on Assets (ROA)

ROA refers to the financial ratio indicating a company's profitability in relation to its total assets. Businesses often use ROA to ascertain the efficacy of a business in using its assets to generate a profit.

Higher ROAs mean the company is efficient and productive in its management of the balance sheet; and manages effectively use its assets. Companies with a five percent or more ROA are comparatively healthier businesses.

Return on Equity (ROE)

The return on equity (ROE) is a financial metric used to calculate a company's health by dividing its net income by the shareholders' equity. The other way of looking at ROE is return on net assets, since shareholders' equity is equal to a company's assets minus liabilities.

This financial metric is used to gauge a company's profitability and efficiency in generating profits; the higher the ROE the more efficient a company manages to generate income and growth from its equity. Businesses with their ROE in the 15 to 20 percentile mark are considered as strong and profitable ventures.

Debt Equity Ratio (DER)

The debt equity ratio or debt-to-equity (D/E) ratio is used to ascertain a company's financial leverage by dividing its total liabilities by its shareholder equity. The D/E ratio, an important corporate finance metric, is used to measure the degree to which a company's finance its operations with debt rather than resources.

In other words, this ratio compares the company's total liabilities with its shareholder equity utilized to assess the company's extent of debt reliance. D/E ratios change depending on economic industries. The ratio is generally used to compare direct competitors or measure the change of debt reliance in a company over time.

Higher D/E ratios open up the company for more risks, while lower ratios may show that the business is in fact at an advantageous spot in utilizing its debt. Investors generally tweak the D/E ratio when considering long-term debt only, since they carry more risks than short-term obligations.

Financial Leverage

Before we discuss what 'leverage' means in this context, let's assess what financial leverage mean in a holistic manner. The financial leverage rises when a company uses borrowed capital as a funding source to invest the expansion of the company's asset base; mostly done to generate returns on risk capital.

In other words, financial leverage is a particular investment strategy used in borrowing money to increase the potential return of an investment. Leverage here refers to the use of debt to amplify returns from the investment or a project.

Investors often use financial leverage to multiply their buying (bull) power in the market. Companies use it to finance their assets; which it does instead of issuing stock to raise capital.

This financial instrument is apt in gauging the risk a company is exposed to in any given position.

It is professionally advised to maintain the percentile of this instrument below 300 percent.

Price Earning Ratio

The price/earning ratio (P/E) tells investors just how a particular company is worth. The P/E ratio is calculated by dividing stock price by the company's earnings per share for a set period of fiscal period.

This is a major financial metric investors often assess when they "put their money" into a company; meaning when they invest in the company's stocks. What they usually do is use the market value per share tied to earnings per share.

P/E ratio shows what the investors can expect in terms of their investment growth. Higher ratios reflect investors will pay higher in terms of per share than what the company is earning. Lower ratios mean that the growth of the company has become sluggish; though this does not always mean that the company has run into trouble - usually low P/E translate to the company's solid footing in its respective market share.

The ratio is also an ample financial metric to compare a company's own historical record or compare aggregate markets against one another.

Proper Research

It is imperative for investors to take extra heed or caution in learning about the financial performances of the companies they are looking to invest in. This is why, it is important to study their financial performance reviews, financial reports and other important instruments to analyze and understand the preferred company's strength; or the most pertinent issues with it that is of importance to the investor in terms of prospective investment.

Maldives welcomes securities and stock trading

Earlier in July 2022, Capital Market Development Authority (CMDA) in association with Maldives Stock Exchange (MSE) created a private placement platform. The platform will allow customers; aspirant traders and investors, to trade with securities of listed companies as well as private company issued sukuks or other debt instruments.

Share this story

Related Stories