A stock is a way for entrepreneurs to finance businesses using money collected from investors. In return for putting in money to finance the company, the investor gets shares of stock that are "secured" by a claim on the assets and profits of a company.
When you buy a corporation's stock, you become part owner of the company. This ownership is also referred to as having equity in the company -- hence stocks are equity securities. As an owner, you are entitled to share in the company's earnings through dividend payments and to benefit from the company's growth through the increase in the market value of the stock you own. Shareholders elect the board of directors, thereby indirectly controlling the management of the company.
Equities / Stock rise or fall in value according to how attractive they are to buyers and the general conditions of the broad stock market. Shareholders' equity : In business and accounting, the shareholders' equity refers to the amount of assets that are owned by a company's shareholders.
This is the most common form of shares an investor will encounter. Anyone can own common shares since there are no restrictions on who can purchase it? Common stockholders have the last claim on assets if the company dissolves after bondholders, other creditors, and preferred stockholders.
A company must pay dividends to its preferred stockholders before it can pay any dividends to its common stockholders. If a company goes bankrupt, preferred stockholders' claims on the company's assets are considered before those of the common stockholders
Domestic and International Portfolios
Equity portfolios that invest primarily in India companies are considered domestic equity portfolios. Equity portfolios that invest primarily in foreign companies are known as international equity portfolios.
Value and growth stocks
Value and growth refer to two distinct approaches to investing. Value stocks are stocks that are considered to be undervalued, either according to their book value or their current or projected earnings. These stocks can be those of smaller less well-known companies and may be more volatile than those of larger companies. Growth stocks are stocks that have shown or are expected to show rapid earnings and revenue growth. Historically, value and growth stocks have tended to show investment growth at different points in the economic cycle, which is why many investors include both of them as a method of diversifying their portfolios.
Large company and small company stocks
Stocks of large, well-established companies with a long earnings history are considered large capitalization equities or large company stocks. Performance of large company stocks can be more reliable than small stocks. That's because large companies often have broader, more diversified product offerings and stronger financial bases. In contrast, small companies often sell a more limited range of products, can have marginal financing and a relatively small management group, but they can grow faster than large companies, and their stocks reflect this. They often have the potential for fast growth, but more risk than larger companies. Once securities are issued to the public, investors may trade them among themselves. Purchase and sale of already-issued securities take place in the secondary markets i.e., BSE & NSE.
An order is a request placed by an investor to buy or sell stock / shares according to certain specifications. Most investors use only a few of the many types of orders available. The three most widely used orders are market orders, limit orders, and stop orders.
An order to buy or sell stock immediately at the best available market price. With this order, the investor would specify the stock and number of shares, but would not specify the time or price. It will be executed promptly, meaning within the next few minutes.
An order to buy stock at a specified price or lower or an order to sell stock at a specified price or higher. Here, the investor specifies the price at which to execute the order. The limit price is never the same as the market's current price.
Buy Limit Order
This type is used to buy stock at a price that is below the current market price. This type of order is placed when the investor feels that the price will decline within the next few weeks before bouncing back.
Sell Limit Order
This order is used to sell stock at a price that is higher than the current market price. The skill in this order is determining how far away from the market price to set the order.
This is an order that becomes a market order to buy or to sell when the stock trades at a specified price. It is used primarily to limit losses on profitable stock positions. When the stock's market price reaches the order's stop price, a stop order automatically becomes a market order and is then executed at the security's market price at the time.
Sell Stop Order
An order that is used to protect profits on a long stock position, or when the investor owns the stock. Thus, when the stock is held by the shareholder and the market value rapidly increases, to protect from any losses from an equally rapid decline, a sell stop order will sell at any indication of a drop.
Buy Stop Order
A buy stop order is used to protect profits on a short stock position. Concerned that a price rise might cause the investor to lose the gain, placing a buy stop order at a certain level above the market price will ensure against this
There are ten basic ingredients to look at when evaluating stocks:
This can be looked up on line or in Value Line
Relative price performance for the next twelve months
All stocks carry risk, but it is possible to calculate their relative risk; the narrower the band of fluctuation, the lower the rating, and the safer the stock
The higher the debt the company is in, the higher the risk
Compares the volatility of a stock's price relative to that of the total market; the lower the beta, the less volatile
Sales and Earnings
High levels of sales and earnings insinuates a higher growth rate
Low stock prices allow you to buy more shares and makes it easier to buy shares in an even lot to reduce transaction costs
Price of a security divided by earnings per share
Helps identify stocks whose prices are more likely to rise than fall by calculating this; evaluates the relative odds of potential gain versus the risk of loss for a given price per shares
Everybody wants companies run by managers with solid track records that can bring the company to the next level of growth
Trading is a time-consuming adventure. Although there are a number of very famous and successful traders, many individuals ignore the fact that these traders are well equipped to trade and have all day to do so. Given the time and effort most successful traders put into their trading, the potential for amateurs to reap the same rewards with less effort and fewer resources is very low. With so much money competing in the one-day to one-year investment time-frame, an individual with a minimal amount of time will probably be more successful finding businesses to own for the long term and not trying to engage in high-octane, almost gambling like behavior. Traders normally use a mix of fundamental, quantitative, and technical techniques with a short term orientation. We have to emphasize here that successful trading requires careful attention, discipline, and a lot of work.
As your investment returns, your returns will begin to gain as well. This allows you to turn a measly rupee into thousands of rupees if you leave it invested long enough. Thus, the more money you save and invest today, the more money you will have in the future for retirement, college tuition, a new car, etc.
Recipe for real wealth
- Cup of awareness
- Cups of willingness
- Teaspoon of knowledge
- Tablespoon of research
- Teaspoon of ability
- Add a dollop of enthusiasm
- Season with miracle of compounding and patience
- Simmer with time until all ingredients are well blended
Quick glossary of the most common risks investors face:
The risk specific to a business, firm or property that may cause it to fail as a result of poor earnings from operations or poor management.
Market or Volatility Risk
Unrelated issues including world events, tax laws and the "mood" of the market can cumulatively affect securities prices resulting in changes in stock prices. While market or volatility risk is a significant short-term risk, it becomes less significant with time.
This is the risk that goes along with putting all of your eggs in one basket. If you own only a few investments, or all of your investments are concentrated in a particular industry or geographic location, you are extremely vulnerable to loss if one of them performs poorly.
Purchasing Power (Inflation) Risk
Although not a short-term risk, in the long term, the cumulative effect of inflation risk erodes value and reduces returns and purchasing power.
Equity securities of small capitalization companies compared to large capitalization companies are subject to greater price volatility and risk due to companies small size, limited product lines, limited access to financing sources and limited management depth.
One of the many things people always want to know about the stock market is, "How do I make money investing?" There are many different approaches; two basic methods are classified as either fundamental analysis or technical analysis. Fundamental analysis refers to analyzing companies by their financial statements. Technical analysis studies price actions in markets through the use of charts and quantitative techniques to attempt to forecast price trends regardless of the company's financial prospects.
Stock that a trader does not actually own may be traded using short selling and Margin buying.
In short selling, the trader borrows stock (usually from his brokerage which holds its clients' shares or its own shares on account to lend to short sellers) then sells it on the market, hoping for the price to fall. The trader eventually buys back the stock, making money if the price fell in the meantime or losing money if it rose. Exiting a short position by buying back the stock is called "covering a short position." This strategy is also used by unscrupulous traders to lower the price of a stock. Hence most markets either prevent a short sell or place restrictions on when and how a short sell can occur. These restrictions are usually referred to as tick rule.
In margin buying, the trader borrows money (at interest) to buy a stock and hopes for it to rise. Most industrialized countries have regulations that require that if the borrowing is based on collateral from other stocks the trader owns outright, it can be a maximum of a certain percentage of those other stocks' value. Other rules may include the prohibition of free-riding: putting in an order to buy stocks without paying initially, and then selling them and using part of the proceeds to make the original payment Finally, one may trade based on inside information known as insider trading. However, this is illegal in most jurisdictions.
The stock market is distinct from a stock exchange, which is a corporation in the business of bringing buyers and sellers of stocks together. Although common, the term 'the stock market' is a somewhat abstract concept for the mechanism that enables the trading of company stocks. It is also used to describe the totality of all stocks, especially within one country, for example in the phrase "the stock market was up today", or in the term stock market bubble. The stock market is the market for the trading of company stock, both those securities listed on a stock exchange as well as those only traded privately.
Stock Market Indices
Statistical tools that measure the state of the stock market or the economy, based on the performance of stocks and other components. The movements of the prices in a market or section of a market are captured in price indices called stock market indices, of which there are many, e.g., SENSEX, NIFTY, and many more. Such indices are usually market capitalization (the total market value of floating capital of the company) weighted, with the weights reflecting the contribution of the stock to the index. The constituents of the index are reviewed frequently to include/exclude stocks in order to reflect the changing business environment.
Many choose to invest via the index method. In this method, on