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Finance GlossaryCANSLIM
CANSLIM
Definition of CANSLIM
CANSLIM is an acronym for a seven-step strategy to pick growth stocks by combining fundamental and technical analysis. Here’s the full form of CANSLIM:
- Current quarterly Earnings Per Share (EPS): compare this fundamental indicator with the same figure from the previous quarter. If the figure grows (by 20% or more as a rule of thumb), the company is fundamentally strong.
- Annual earnings: Compare this fundamental indicator from the previous years. If there’s year-on-year growth, the company is fundamentally strong. If the year-on-year growth is by 20-25%, even better.
- New product or service: strong companies continue to innovate. That’s what this letter is about - checking if the company is continuously launching new products, services, or holding events.
- Supply: a fundamentally strong business should have a good supply and demand when it comes to its goods, services, and stock. Executive supply of shares may reduce the value of the company - that’s why it should always be scarce in supply.
- Leader: the company should be a leader in its own right, either in or across industries.
- Institutional holding: a valuable company will have higher institutional ownership, the percentage of which should always be tracked.
- Market trend: an investor must check whether the company or stock is going or against the trend by comparing it to broader indices.
Related Terms
Fair Value
The fair value of a stock, product, or service is the price at which the buyer and seller willingly agree on without being on the losing end of the deal. Think of fair value as a win-win situation for both parties, assuming that all conditions are normal.
Say Mr. Apple is offered to buy shares of Mr. Orange’s company at Rs. 1000 per share. Mr. Apple evaluates the business and figures out that he can sell the same shares for Rs. 1200, even though Mr. Orange is content to sell the shares at Rs. 200 lower. Both parties agree on the deal at Rs. 1000 because both view it as a good deal.
The formula for the fair value of a stock or index is:
Fair Value = Cash * { 1 + r (X / 360)} - D
Where,
Cash = Latest stock or index value
r = interest rate on purchase
x = number of days to contract expiry
Dividend = Dividends
The definition of fair value is slightly different in the futures market. In the futures market, the fair value is reached when the supply meets the demand, which simply means that the spot price is equal to the futures contractprice.
However, due to inherent volatility of the markets, the price of a futures contract is known to fluctuate around the fair value of a stock or index. Thus, in the fair value in the context of futures is what the price of the contract should be, given the value of the stock or index, dividends, and others.
Say Mr. Apple is offered to buy shares of Mr. Orange’s company at Rs. 1000 per share. Mr. Apple evaluates the business and figures out that he can sell the same shares for Rs. 1200, even though Mr. Orange is content to sell the shares at Rs. 200 lower. Both parties agree on the deal at Rs. 1000 because both view it as a good deal.
The formula for the fair value of a stock or index is:
Fair Value = Cash * { 1 + r (X / 360)} - D
Where,
Cash = Latest stock or index value
r = interest rate on purchase
x = number of days to contract expiry
Dividend = Dividends
The definition of fair value is slightly different in the futures market. In the futures market, the fair value is reached when the supply meets the demand, which simply means that the spot price is equal to the futures contractprice.
However, due to inherent volatility of the markets, the price of a futures contract is known to fluctuate around the fair value of a stock or index. Thus, in the fair value in the context of futures is what the price of the contract should be, given the value of the stock or index, dividends, and others.
Dividend Yield
A dividend yield is a ratio of dividends paid per share by the latest share price, expressed as a percentage. It is used to understand how much dividends a company pays per share outstanding. The formula to calculate dividend yields is:
Dividend Yield: Dividend Per Share / Current Shar Price
A high dividend yield indicates a company’s willingness to redistribute more profits to shareholders, while a low dividend yield signals the opposite.
Dividend Yield: Dividend Per Share / Current Shar Price
A high dividend yield indicates a company’s willingness to redistribute more profits to shareholders, while a low dividend yield signals the opposite.
Cash Reserve Ratio
Cash Reserve Ratio (CRR) is the amount of liquid cash a bank has to deposit with the Reserve Bank of India (RBI), calculated as a percentage of the total deposit of the bank. The latest Cash Reserve Ratio in India is 4.5%.
There are two important uses of CRR:
- It acts as a reserve or collateral because banks borrow money from the RBI
-
The RBI decides the interest rate for borrowing based on the CRR
These two pointers become extremely important during high inflation as the RBI can hike interest rates with the assurance of having collateral from banks.
Gross Domestic Product
The Gross Domestic Product is an economic measure of the financial value of all goods and services produced by a country during a specific time period.
Equity Options
An equity option gives the holder the right but not the obligation to buy or sell the underyling shares at a pre-agreed price and date. Equity options are derivative contracts that derive value from underlying shares.
Every equity option comes with a lot size that specifies the total number of underlying shares the contract contains. A trade who wants to start options trading can procure the derivative contract by paying a premium.
Every equity option comes with a lot size that specifies the total number of underlying shares the contract contains. A trade who wants to start options trading can procure the derivative contract by paying a premium.
Leverage In Stock Market
Leverage is a loan that a broker offers to allow traders to take up bigger positions by paying lesser capital. This feature is known as Margin Trading Facility (MTF) or simply margin funding. Leverage is often represented as a multiple like 2x, 3x, 4x, and so on. For example, getting 4x leverage on a trade worth ₹1,00,000 means you’ll pay ₹25,000 and the broker will cover the rest of the ₹75,000.
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