Calculating Support & Resistance
Steps in Calculation of Support & Resistance
Step 1 Find out 52 Week High & Low for the stock
Let's suppose,
52 Week High = 1000
52 Week Low = 500
Step 2 Calculate difference between 52 Week High & Low
We have,
Difference = 500
Step 3 Divide the difference by 8
We have,
Result = 63
Step 4 Keep on adding "Step 3" figure (result) in 52 Week Low price till you reach 52 Week High to find out support & resistance for any stock
Here we go,
52 Week Low 500
563
625
688
750
813
875
938
52 Week High 1000
Step 5 Find out 8 Brackets which states Support & Resistance.
Bracket 1: 500 to 563,
Bracket 2: 563 to 625,
Bracket 3: 625 to 688,
Bracket 4: 688 to 750,
Bracket 5: 750 to 813,
Bracket 6: 813 to 875,
Bracket 7: 875 to 938,
Bracket 8: 938 to 1000
Step 6 Check Support & Resistance of Stock
Let's suppose,
CMP (Market Price) for Stock is 700
Try to find out the bracket in which CMP lies. It is evident that it is between 688 & 750. So the support for this stock would be 688 (lowest figure in bracket) which means that you should become cautious or should sell off your stock if it breaches 688 otherwise your stock may slip further. Resistance for this stock is at 750 (highest figure in the bracket) which mean that if CMP has crossed then there is probability that this stock will go up or gain upward momentum.
@ CMP (stock price)of 700
Support is 688 and
Resistance is 750
 |
| Graph Showing Support & Resistance |
Payback Period Method
Relevant Facts
a. The Payback period doesn’t have decision rule like NPV (Net Present Value) & IRR (internal Rate of Return). This is just a liquidity measure.
b. Acceptance or rejection of the proposal totally depends on the specified timeframe in which company / individual wants their money back.
c. Payback period should not be used alone. It should be used alongside any one of the DCF (Discounted cash flow) techniques i.e. NPV (Net Present Value) or IRR (Internal Rate of Return).
How to calculate Payback Period?
Suppose, Initial cash outflow is $90,000 for two projects i.e. A & B
Cash inflows for subsequent years are mentioned below.
Calculate the cumulative cash inflow in a separate column & calculate it till the last inflow. Mark a year in which you find your initial investment is recovered.
Hence, it is clear from the table that
a. Payback period for Project A is 7 Years, Total cash inflow is $1,35,000
b. Payback period for Project B is 4 Years, Total cash inflow is $1,00,000
Now the question arises, which project to choose? Most of the people who prefer Payback Period method would suggest Project B but Project A can’t be ignored due to surplus cash inflow of $35,000 ($1, 35,000 - $1, 00,000). Hence it is suggested that one should use Payback Period method in combination of DCF methods and base their judgement by evaluating all aspects.
Advantages of Payback period method
1. It’s easy & simple to calculate.
2. It measures the liquidity aspect of the proposal. The project with Payback period of 3 years can be considered more liquid as compared to project with Payback period of 5 years.
Disadvantages of Payback period method
1. It ignores many cash inflows which happen after payback period. Hence, the projects which tend to generate larger cash inflow at later years get discriminated.
2. It ignores the salvage value & total economic life of the project.
3. Most importantly, it ignores the time value of money.
4. It doesn't account for the profitability figure out of a project. Long term profitability should not be ignored during selection of project.
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