You must have heard stories of the fabulous returns made in the stock markets in recent months. And you longed wishfully for a piece of the action.
But you could also have heard horror stories of how a friend lost his shirt in the stock market.
And were promptly thankful that you didn't lose yours.
Let's set the record straight.
Wisely chosen (those are the key words), stocks are a must for any serious investor.
They add that extra zing to your collection of investments.
Study after study has revealed that over the long term, stocks outperform all other assets. That means you can expect to earn more from shares than from bonds, fixed deposits or gold.
No doubt the risk is higher with shares. But if you are in for the long haul, so are the potential returns.
But before you take the plunge and invest in the stock market, get your basics right.
This series will tell you about the basics of investing in stocks.
1. Stocks are not only for the brilliant
Stocks are far from being rocket science.
The strategies you need to know to maximise your wealth and the pitfalls you need to avoid are not beyond comprehension.
Even if you feel that you don't have the time, and prefer to entrust your money to a portfolio manager or mutual fund, the least you need to know is which funds are better, how to choose your fund manager, and keep a tab on his performance.
2. So what is a share?
Any business has a lot of assets: The machinery, buildings, furniture, stock-in-trade, cash, etc.
It will also have liabilities. This is what the company owes other people. Bank loans, money owed to people from whom things have been bought on credit, are examples of liabilities.
Take away the liabilities from the total assets, and you are left with the capital.
Assets - Liabilities = Capital.
Capital is the amount that the owner has in the business. As the business grows and makes profits, it adds to its capital.
This capital is subdivided into shares (or stocks).
So if a company's capital is Rs 10 crore (Rs 100 million), that could be divided into 1 crore (10 million) shares of Rs 10 each.
Part of this capital, or some of the shares, is held by the people who started the business, called the promoters.
The other shares are held by investors. These investors could be people like you and me or mutual funds and other institutional investors.
3. What does this mean for me?
You must have realised by now that owning a share means owning a share in the business.
When you invest in stocks, you do not invest in the market. You invest in the equity shares in a company. That makes you a shareholder or part owner in the company.
Since you own part of the assets of the company, you are entitled to the profits those assets generate. Or bear the loss.
So, if you own 100 shares of Gujarat Ambuja Cement, for example, you own a very small part -- since Gujarat Ambuja has millions of shares -- of the company. You own a share of its assets, its liabilities, its profits, its losses, and so on.
Owning shares, therefore, means having a share of a business without the headache of managing it.
Your Gujarat Ambuja shares, for instance, will rise in value if the company makes good profits, or may do badly if people stop building houses and demand for cement falls.
4. What do mean by rise in value?
If the company has divided its capital into shares of Rs 10 each, then Rs 10 is called the face value of the share.
When the share is traded in the stock market, however, this value may go up or down depending on supply and demand for the stock.
If everyone wants to buy the shares, the price will go up. If nobody wants to buy them, and many want to sell the shares, the price will fall.
The value of a share in the market at any point of time is called the price of the share or the market value of a stock. So the share with a face value of Rs 10, may be quoted at Rs 55 (higher than the face value), or even Rs 9 (lower than the face value).
If the number of shares in a company is multiplied by its market value, the result is market capitalisation.
For instance, a company having 10 million shares of a face value Rs 10 and a market value of Rs 30 as on November 1, 2004, will have a market capitalisation of Rs 300 million as on November 1, 2004.
5. So how does one buy shares?
Alright, you have decided you want part of the action. Shares are bought and sold on the stock exchanges -- the two main ones in India are the National Stock Exchange (NSE), and the Bombay Stock Exchange (BSE).
You can use three different routes to buy shares: Through your broker, trade directly online, or buy shares when a company comes out with a fresh issue of shares. This is called an initial public offering (IPO).
Now that we have demystified the key words -- shares, face value, market value and market capitalisation -- in the subsequent articles, we will explore how to buy and sell stocks, and how to subscribe to a new issue.
Thursday, October 16, 2008
Make money with shares
Good question indeed. Why do people buy shares?
In a line: Because they can make big money on it.
There's a huge difference between the gains and losses you can make by investing in the stock market as compared to your returns from bank fixed deposits.
In stocks, you can make unbelievable money -- it's not uncommon for people to have doubled their money in the last one year.
On the flip side (there is always one), when the markets crashed in May, many people lost more than a quarter of their investment.
Compare this with your bank fixed deposit. Your FD will only fetch you around five to six percent per annum, but you can be sure of getting your money back.
When you put your money in a bank deposit, you loan the money to a bank for a fixed return (rate of interest) and a fixed tenure (number of months or years). At the end, you get back your original amount and you are paid interest on the same.
When you invest in stocks, you do not invest in the market (despite what you think). You invest in the equity shares of a company. That makes you a shareholder or part-owner in the company.
The good news is that since you own a part of the assets of the company, you are entitled to a share in the profits those assets generate.
The bad news is that you are also expected to bear the losses, if any.
Now, if you are a shareholder, there are two ways you can benefit from the profits of the company: capital appreciation or dividend.
Dividend
Usually, a company distributes a part of the profit it earns as dividend.
For example: A company may have earned a profit of Rs 1 crore in 2003-04. It keeps half that amount within the company. This will be utilised on buying new machinery or more raw materials or even to reduce its borrowing from the bank. It distributes the other half as dividend.
Assume that the capital of this company is divided into 10,000 shares. That would mean half the profit -- ie Rs 50 lakh (Rs 5 million) -- would be divided by 10,000 shares; each share would earn Rs 500. The dividend would then be Rs 500 per share. If you own 100 shares of the company, you will get a cheque of Rs 50,000 (100 shares x Rs 500) from the company.
Sometimes, the dividend is given as a percentage -- i e the company says it has declared a dividend of 50 percent. It's important to remember that this dividend is a percentage of the share's face value. This means, if the face value of your share is Rs 10, a 50 percent dividend will mean a dividend of Rs 5 per share (See What's in a share? Money!).
However, chances are you would not have paid Rs 10 (the face value) for the share.
Let's say you paid Rs 100 (the then market value). Yet, you will only get Rs 5 as your dividend for every share you own. That, in percentage terms, means you got just five percent as your dividend and not the 50 percent the company announced.
Or, let's say, you paid Rs 9 (the then market value). You will still get Rs 5 per share as dividend. That means, in percentage terms, you got just 55.55 percent as dividend yield and not the 50 percent the company announced.
Capital Gain
As the company expands and grows, acquires more assets and makes more profit, the value of its business increases. This, in turn, drives up the value of the stock. So, when you sell, you will receive a premium over (more than) what you paid.
This is known as capital gain and this is the main reason why people invest in stocks. They want to make money by selling the stock at a profit.
It is not as easy as it sounds. A stock's price is always on the move. It could either appreciate (increase in value) or depreciate (decrease in value) with respect to the price at which you purchased it.
If you buy a stock for Rs 10 and sell it for Rs 20 after a year, then your return from that stock is Rs 10, or 100 percent.
Or, if you buy a stock for Rs 10 and sell it for Rs 9, you lose Rs 1, or your loss is 10 percent.
Now look at both: Dividend and Capital Gain
If you buy a stock for Rs 10 and sell it for Rs 20 after a year, then your return from that stock is Rs 10, or 100 percent.
Add the Rs 5 per share you have received as dividend, and your total return will be Rs 10 plus Rs 5 = Rs 15 or 150 percent (Rs 15 divided by Rs 10 multiplied by 100).
If you buy a stock for Rs 10 and sell it for Rs 9 after a year, you would lose Rs 1 per share.
However, you would have got Rs 5 as dividend. So you would net Rs 4 as earnings from the company.
In percentage terms, your return would be 40 percent (Rs 4 divided by Rs 10 multiplied by 100).
Tax
One last point.
If you are a tax payer, the finance minister has made it very easy for you to invest in the stock market. There is no tax on dividend. Neither will you be taxed on long-term capital gains. This means, if you buy a share, hold it for at least a year and sell it at a profit, you don't have to pay any tax on the profit your make. If you sell it within a year, the short-term capital gains tax is only 10 percent.
Contrast this with fixed deposits, where you have to pay tax on the interest at your marginal tax rate. This means that, if you are in the 30 percent tax bracket and your interest income exceeds Rs 12,000 in a year, you'll have to pay tax on your interest income at that rate (including the surcharge, the cess, etc, the rate works out to almost 35 percent).
Investing in stocks may be more risky, but it is more tax-friendly. Besides, there is the potential to get a higher return on your investment
In a line: Because they can make big money on it.
There's a huge difference between the gains and losses you can make by investing in the stock market as compared to your returns from bank fixed deposits.
In stocks, you can make unbelievable money -- it's not uncommon for people to have doubled their money in the last one year.
On the flip side (there is always one), when the markets crashed in May, many people lost more than a quarter of their investment.
Compare this with your bank fixed deposit. Your FD will only fetch you around five to six percent per annum, but you can be sure of getting your money back.
When you put your money in a bank deposit, you loan the money to a bank for a fixed return (rate of interest) and a fixed tenure (number of months or years). At the end, you get back your original amount and you are paid interest on the same.
When you invest in stocks, you do not invest in the market (despite what you think). You invest in the equity shares of a company. That makes you a shareholder or part-owner in the company.
The good news is that since you own a part of the assets of the company, you are entitled to a share in the profits those assets generate.
The bad news is that you are also expected to bear the losses, if any.
Now, if you are a shareholder, there are two ways you can benefit from the profits of the company: capital appreciation or dividend.
Dividend
Usually, a company distributes a part of the profit it earns as dividend.
For example: A company may have earned a profit of Rs 1 crore in 2003-04. It keeps half that amount within the company. This will be utilised on buying new machinery or more raw materials or even to reduce its borrowing from the bank. It distributes the other half as dividend.
Assume that the capital of this company is divided into 10,000 shares. That would mean half the profit -- ie Rs 50 lakh (Rs 5 million) -- would be divided by 10,000 shares; each share would earn Rs 500. The dividend would then be Rs 500 per share. If you own 100 shares of the company, you will get a cheque of Rs 50,000 (100 shares x Rs 500) from the company.
Sometimes, the dividend is given as a percentage -- i e the company says it has declared a dividend of 50 percent. It's important to remember that this dividend is a percentage of the share's face value. This means, if the face value of your share is Rs 10, a 50 percent dividend will mean a dividend of Rs 5 per share (See What's in a share? Money!).
However, chances are you would not have paid Rs 10 (the face value) for the share.
Let's say you paid Rs 100 (the then market value). Yet, you will only get Rs 5 as your dividend for every share you own. That, in percentage terms, means you got just five percent as your dividend and not the 50 percent the company announced.
Or, let's say, you paid Rs 9 (the then market value). You will still get Rs 5 per share as dividend. That means, in percentage terms, you got just 55.55 percent as dividend yield and not the 50 percent the company announced.
Capital Gain
As the company expands and grows, acquires more assets and makes more profit, the value of its business increases. This, in turn, drives up the value of the stock. So, when you sell, you will receive a premium over (more than) what you paid.
This is known as capital gain and this is the main reason why people invest in stocks. They want to make money by selling the stock at a profit.
It is not as easy as it sounds. A stock's price is always on the move. It could either appreciate (increase in value) or depreciate (decrease in value) with respect to the price at which you purchased it.
If you buy a stock for Rs 10 and sell it for Rs 20 after a year, then your return from that stock is Rs 10, or 100 percent.
Or, if you buy a stock for Rs 10 and sell it for Rs 9, you lose Rs 1, or your loss is 10 percent.
Now look at both: Dividend and Capital Gain
If you buy a stock for Rs 10 and sell it for Rs 20 after a year, then your return from that stock is Rs 10, or 100 percent.
Add the Rs 5 per share you have received as dividend, and your total return will be Rs 10 plus Rs 5 = Rs 15 or 150 percent (Rs 15 divided by Rs 10 multiplied by 100).
If you buy a stock for Rs 10 and sell it for Rs 9 after a year, you would lose Rs 1 per share.
However, you would have got Rs 5 as dividend. So you would net Rs 4 as earnings from the company.
In percentage terms, your return would be 40 percent (Rs 4 divided by Rs 10 multiplied by 100).
Tax
One last point.
If you are a tax payer, the finance minister has made it very easy for you to invest in the stock market. There is no tax on dividend. Neither will you be taxed on long-term capital gains. This means, if you buy a share, hold it for at least a year and sell it at a profit, you don't have to pay any tax on the profit your make. If you sell it within a year, the short-term capital gains tax is only 10 percent.
Contrast this with fixed deposits, where you have to pay tax on the interest at your marginal tax rate. This means that, if you are in the 30 percent tax bracket and your interest income exceeds Rs 12,000 in a year, you'll have to pay tax on your interest income at that rate (including the surcharge, the cess, etc, the rate works out to almost 35 percent).
Investing in stocks may be more risky, but it is more tax-friendly. Besides, there is the potential to get a higher return on your investment
Spot a good stock. Win big!
Between MTV and Channel [V], you might have sometimes come across, say, CNBC.
You might have noticed a band that runs at the bottom of the screen containing the stock prices.
This is called the ticker.
Watch this ticker for some time, and you will find that stock prices are constantly going up or down. Rarely do they stay put.
Which brings you to the common question: when should you buy stocks?
Pose this question to any stock market guru (even someone who falsely professes to be one), and you will get this answer: Buy Low. Sell High.
That means you should buy stocks at a low price and sell them at a high price.
Easier said than actually done, of course.
Which brings us to the next question: how do you know if a stock is worth buying?
One, look at the 'fundamentals' of the stock: check the underlying factors behind the stock price.
In other words, find out what it is about this stock that makes it hot.
Let me introduce you to three ways by which you can figure that out.
1. Earnings per Share (EPS): How well the company is doing
Company XYZ Ltd.
Capital: Rs 100 crore (Rs 1 billion).
Capital is the amount the owner has in the business.
As the business grows and makes profits, it adds to its capital.
This capital is subdivided into shares (or stocks).
For a clearer understanding of capital, read What's in a share? Money!
The capital is divided into 100 million shares of Rs 10 each.
Net Profit in 2003-04: Rs 20 crore (Rs 200 million).
EPS is the net profit divided by the total number of shares.
EPS = net profit/ number of shares
EPS = Rs 20 crore (Rs 200 million)/ 10 crore (100 million) shares = Rs 2 per share
Lesson to be learnt
If a company's EPS has grown over the years, it means the company is doing well, and the price of the share will go up. If the EPS declines, that's a bad sign, and the stock price falls.
Companies are required to publish their quarterly results. Keep an eye out for these results; check for the trend in their EPS.
2. Price earnings ratio (PE ratio): How other investors view this share
Two stocks may have the same EPS. But they may have different market prices.
That's because, for some reason, the market places a greater value on that stock.
PE ratio is the market price of the stock divided by its EPS.
PE = market price/ EPS
Let's take an example of two companies.
Company XYZ Ltd
Market price = Rs 100
EPS = Rs 2
PE ratio = 100/ 2 = 50
Company ABC Ltd
Market price = Rs 200
EPS = Rs 2
PE ratio = 200/ 2 = 100
In the above cases, both companies have the same EPS.
But because their market price is different, the PE ratio is different.
Lesson to be learnt
In the case of EPS, it is not so much a high or low EPS that matters as the growth in the EPS. The company's PE reflects investors' expectations of future growth in the EPS. A high PE company is one where investors have hopes that earnings will rise, which is why they buy the share.
3. Forward PE: Looking ahead
The stock market is not nostalgic. It is forward looking.
For instance, it sometimes happens that a sick company, that has made losses for several years, gets a rehabilitation package from its bank and a new CEO.
As a consequence, the company's stock shoots up.
Why? Because investors think the company will do better in the future because of the package and new leadership, and its earnings will go up.
And they think it is a good time to buy the shares of the company now.
Suddenly, the demand for the shares have gone up.
Because stock prices are based on expectations of future earnings, analysts usually estimate the future earnings per share of a company. This is known as the forward PE.
Forward PE is the current market price divided by the estimated EPS, usually for the next financial year.
Forward PE = Current market price/ estimate EPS for the next financial year.
To illustrate what we��ve been talking about, let's take the example of Infosys Technologies.
Trailing 12-month EPS = Rs 56.82 (EPS of the last four quarters)
Closing price on January 6 = Rs 2043.15
PE = Price/EPS = 2043.15/ 56.82 = 35.95
The PE of Infosys [Get Quote] as on January 6 = 35.95
Clear? Now be alert:
Estimated EPS for 2004-05 = Rs 67
Estimated EPS for 2005-06 = Rs 90
These figures are according to brokers' consensus estimates (you can find those in the business daily, Economic Times).
Forward PE = current market price/ esimated EPS for next financial year
Forward PE for 2004-05 = 2043.15/ 67 = 30.49
Forward PE for 2005-06 = 2043.15/ 90 = 22.70
With an EPS growth of over 30%, a forward PE of 22.7 is not high, indicating that there is scope to be optimistic about the stock's price.
Lesson to be learnt
Sometimes, investors look out for a low PE stock, expecting that its price will rise in the future. But sometimes, low PE stocks may remain low PE stocks for ages, because the market doesn't fancy them.
Keep tab on the business news to check out the company's prospects in the future.
That was the basics of fundamental analysis. Not too mind boggling, is it?
Next time you want to buy the shares of a company, at least do this groundwork.
Please watch out for ratios and how to calculate shares in the coming pieces.
You might have noticed a band that runs at the bottom of the screen containing the stock prices.
This is called the ticker.
Watch this ticker for some time, and you will find that stock prices are constantly going up or down. Rarely do they stay put.
Which brings you to the common question: when should you buy stocks?
Pose this question to any stock market guru (even someone who falsely professes to be one), and you will get this answer: Buy Low. Sell High.
That means you should buy stocks at a low price and sell them at a high price.
Easier said than actually done, of course.
Which brings us to the next question: how do you know if a stock is worth buying?
One, look at the 'fundamentals' of the stock: check the underlying factors behind the stock price.
In other words, find out what it is about this stock that makes it hot.
Let me introduce you to three ways by which you can figure that out.
1. Earnings per Share (EPS): How well the company is doing
Company XYZ Ltd.
Capital: Rs 100 crore (Rs 1 billion).
Capital is the amount the owner has in the business.
As the business grows and makes profits, it adds to its capital.
This capital is subdivided into shares (or stocks).
For a clearer understanding of capital, read What's in a share? Money!
The capital is divided into 100 million shares of Rs 10 each.
Net Profit in 2003-04: Rs 20 crore (Rs 200 million).
EPS is the net profit divided by the total number of shares.
EPS = net profit/ number of shares
EPS = Rs 20 crore (Rs 200 million)/ 10 crore (100 million) shares = Rs 2 per share
Lesson to be learnt
If a company's EPS has grown over the years, it means the company is doing well, and the price of the share will go up. If the EPS declines, that's a bad sign, and the stock price falls.
Companies are required to publish their quarterly results. Keep an eye out for these results; check for the trend in their EPS.
2. Price earnings ratio (PE ratio): How other investors view this share
Two stocks may have the same EPS. But they may have different market prices.
That's because, for some reason, the market places a greater value on that stock.
PE ratio is the market price of the stock divided by its EPS.
PE = market price/ EPS
Let's take an example of two companies.
Company XYZ Ltd
Market price = Rs 100
EPS = Rs 2
PE ratio = 100/ 2 = 50
Company ABC Ltd
Market price = Rs 200
EPS = Rs 2
PE ratio = 200/ 2 = 100
In the above cases, both companies have the same EPS.
But because their market price is different, the PE ratio is different.
Lesson to be learnt
In the case of EPS, it is not so much a high or low EPS that matters as the growth in the EPS. The company's PE reflects investors' expectations of future growth in the EPS. A high PE company is one where investors have hopes that earnings will rise, which is why they buy the share.
3. Forward PE: Looking ahead
The stock market is not nostalgic. It is forward looking.
For instance, it sometimes happens that a sick company, that has made losses for several years, gets a rehabilitation package from its bank and a new CEO.
As a consequence, the company's stock shoots up.
Why? Because investors think the company will do better in the future because of the package and new leadership, and its earnings will go up.
And they think it is a good time to buy the shares of the company now.
Suddenly, the demand for the shares have gone up.
Because stock prices are based on expectations of future earnings, analysts usually estimate the future earnings per share of a company. This is known as the forward PE.
Forward PE is the current market price divided by the estimated EPS, usually for the next financial year.
Forward PE = Current market price/ estimate EPS for the next financial year.
To illustrate what we��ve been talking about, let's take the example of Infosys Technologies.
Trailing 12-month EPS = Rs 56.82 (EPS of the last four quarters)
Closing price on January 6 = Rs 2043.15
PE = Price/EPS = 2043.15/ 56.82 = 35.95
The PE of Infosys [Get Quote] as on January 6 = 35.95
Clear? Now be alert:
Estimated EPS for 2004-05 = Rs 67
Estimated EPS for 2005-06 = Rs 90
These figures are according to brokers' consensus estimates (you can find those in the business daily, Economic Times).
Forward PE = current market price/ esimated EPS for next financial year
Forward PE for 2004-05 = 2043.15/ 67 = 30.49
Forward PE for 2005-06 = 2043.15/ 90 = 22.70
With an EPS growth of over 30%, a forward PE of 22.7 is not high, indicating that there is scope to be optimistic about the stock's price.
Lesson to be learnt
Sometimes, investors look out for a low PE stock, expecting that its price will rise in the future. But sometimes, low PE stocks may remain low PE stocks for ages, because the market doesn't fancy them.
Keep tab on the business news to check out the company's prospects in the future.
That was the basics of fundamental analysis. Not too mind boggling, is it?
Next time you want to buy the shares of a company, at least do this groundwork.
Please watch out for ratios and how to calculate shares in the coming pieces.
5 things you must know before buying shares
friend of mine recently landed her first job.
She spent her first few paychecks on a new cell phone, and a new wardrobe to go with it. Then, her parents began pressurise her to save.
Her question to me was: which shares can I invest in?
When I proceeded to tell her that shares were the riskiest of all investments (bonds, fixed deposits, post office schemes, gold etc), she shrugged.
When I asked her if she even knew what a share was, she confessed she did not.
I could not blame her.
Over the last year or so, the stock market has been hogging the limelight. Companies have been coming out with Intial Public Offerings (which is when the company first makes its shares available to the public by getting them listed on the stock exchange). Everyone wants to join the party and make money.
If you identify with her, here is a tutorial to help you get your basics right. Before you invest in the stock market, you must understand what it entails.
How to invest in an IPO
1. You own a part of the business
When you invest in stocks, you do not invest in the market (despite what you think). You invest in the equity shares of a company. That makes you a shareholder; you now own a small part of that business without having to go to work there.
The good news is, since you own part of the company, you are entitled to a share in its profits.
The bad news is that you are also expected to bear the losses, if any.
That is why investing in shares is risky. If the company does well, you benefit. If it does not, you lose. There are no guarantees whatsoever.
Read this before you buy an IPO
2. In the short-run, the price of the share can wildly fluctuate
Let's say the company fixes the price of each share at Rs 10. This is called the face value of the share.
When the share is traded in the stock market, this value may go up or down depending on supply of and demand for the stock.
If everyone wants to buy the shares, the price will go up. If nobody wants to buy the shares, and many want to sell them, the price will fall.
The value of a share in the market at any point of time is called the 'price of the share' or the 'market value of a stock'.
A share with a face value of Rs 10 may be quoted at Rs 55 (higher than the face value) or even Rs 9 (lower than the face value).
So you might have paid Rs 15 for a share which is now quoting at Rs 12. Don't panic and sell. If it is a good company, the share price will eventually rise.
The prices will get influenced by the market sentiment and the general direction of the market. As a result, you may see short-term slumps.
What you should know about mutual fund IPOs
3. Always invest for the long-term
The best way to make money is to buy low and sell high. This means you should buy the share when the price is low and sell it when it is high.
That is why you must buy in a bear market. This is a term used to describe the sentiment of the stock market when it is low and the prices of shares have generally fallen. The best time to sell is in a bull market, when the sentiment is high and the prices of shares are rising.
But it is very difficult to time the market. In fact, no one can do it. If we could, we would all be millionaires, wouldn't we?
That is why, when you invest in the market, it is best to invest for the long-term. Hold on to your shares for a few years before you think of selling them.
Companies increase their sales and book higher profits over the years. This will eventually reflect in the share price, so ignore the short-term slumps.
Once you decide that you are in for the long haul, you can ride over the bear and bull runs with no stress at all. Over time, the price of your shares will appreciate.
If you are getting a good price for your stock, keep selling small amounts at regular intervals. Keep booking profits.
Why you need a stock broker
4. Decide how much you want to invest
Always remember one basic rule in finance -- if something gives you higher returns, that's usually because it carries a greater risk.
That's the reason why not-so-good companies will pay you a higher rate of interest for your deposits.
The same reasoning goes for stocks too -- they give higher returns than, say, bank fixed deposits because they are more risky. So the amount of money you invest in the market depends on your capacity to bear the risk.
If you are young with a steady job, you can invest a larger proportion of your income in the stock market than, say your parents who are close to retirement. If you have a lot of debt to repay, avoid putting too much of your money in stocks.
It's best to decide how much of your savings you will allocate to stocks, and stick to that plan. Don't get swayed by how much your friend is investing.
How to get a broker
5. Don't rely solely on 'good advice'
A smart investor should never invest buy shares of companies he doesn't know much about. Relying on 'advice' from friends is not always a great idea. Do some groundwork yourself.
It doesn't matter who is buying the stock or who is recommending it. Steer clear of such ways of making a fast buck. These tips will land you in a soup.
When you hear of a 'hot tip', dig further.
Take a look at the company's profit and loss statement, which would have been audited by chartered accountants. There is a wealth of information here. To understand the information in a Profit & Loss Account, read Want to buy a stock? Read this first.
Do some basic calculations on your own. The Earnings Per Share (net profit/ number of shares) and Price/Earnings ratio (market price/ EPS) should give you a fair understanding. Read How to spot a good stock to understand what these ratios mean and how to use them.
These tips should get you started. Tread cautiously though. If stocks intimidate you, consider a diversified equity fund.
A mutual fund manager will research many companies before investing in their shares. This way, you can participate in the stock market even as you leave the research to professionals.
She spent her first few paychecks on a new cell phone, and a new wardrobe to go with it. Then, her parents began pressurise her to save.
Her question to me was: which shares can I invest in?
When I proceeded to tell her that shares were the riskiest of all investments (bonds, fixed deposits, post office schemes, gold etc), she shrugged.
When I asked her if she even knew what a share was, she confessed she did not.
I could not blame her.
Over the last year or so, the stock market has been hogging the limelight. Companies have been coming out with Intial Public Offerings (which is when the company first makes its shares available to the public by getting them listed on the stock exchange). Everyone wants to join the party and make money.
If you identify with her, here is a tutorial to help you get your basics right. Before you invest in the stock market, you must understand what it entails.
How to invest in an IPO
1. You own a part of the business
When you invest in stocks, you do not invest in the market (despite what you think). You invest in the equity shares of a company. That makes you a shareholder; you now own a small part of that business without having to go to work there.
The good news is, since you own part of the company, you are entitled to a share in its profits.
The bad news is that you are also expected to bear the losses, if any.
That is why investing in shares is risky. If the company does well, you benefit. If it does not, you lose. There are no guarantees whatsoever.
Read this before you buy an IPO
2. In the short-run, the price of the share can wildly fluctuate
Let's say the company fixes the price of each share at Rs 10. This is called the face value of the share.
When the share is traded in the stock market, this value may go up or down depending on supply of and demand for the stock.
If everyone wants to buy the shares, the price will go up. If nobody wants to buy the shares, and many want to sell them, the price will fall.
The value of a share in the market at any point of time is called the 'price of the share' or the 'market value of a stock'.
A share with a face value of Rs 10 may be quoted at Rs 55 (higher than the face value) or even Rs 9 (lower than the face value).
So you might have paid Rs 15 for a share which is now quoting at Rs 12. Don't panic and sell. If it is a good company, the share price will eventually rise.
The prices will get influenced by the market sentiment and the general direction of the market. As a result, you may see short-term slumps.
What you should know about mutual fund IPOs
3. Always invest for the long-term
The best way to make money is to buy low and sell high. This means you should buy the share when the price is low and sell it when it is high.
That is why you must buy in a bear market. This is a term used to describe the sentiment of the stock market when it is low and the prices of shares have generally fallen. The best time to sell is in a bull market, when the sentiment is high and the prices of shares are rising.
But it is very difficult to time the market. In fact, no one can do it. If we could, we would all be millionaires, wouldn't we?
That is why, when you invest in the market, it is best to invest for the long-term. Hold on to your shares for a few years before you think of selling them.
Companies increase their sales and book higher profits over the years. This will eventually reflect in the share price, so ignore the short-term slumps.
Once you decide that you are in for the long haul, you can ride over the bear and bull runs with no stress at all. Over time, the price of your shares will appreciate.
If you are getting a good price for your stock, keep selling small amounts at regular intervals. Keep booking profits.
Why you need a stock broker
4. Decide how much you want to invest
Always remember one basic rule in finance -- if something gives you higher returns, that's usually because it carries a greater risk.
That's the reason why not-so-good companies will pay you a higher rate of interest for your deposits.
The same reasoning goes for stocks too -- they give higher returns than, say, bank fixed deposits because they are more risky. So the amount of money you invest in the market depends on your capacity to bear the risk.
If you are young with a steady job, you can invest a larger proportion of your income in the stock market than, say your parents who are close to retirement. If you have a lot of debt to repay, avoid putting too much of your money in stocks.
It's best to decide how much of your savings you will allocate to stocks, and stick to that plan. Don't get swayed by how much your friend is investing.
How to get a broker
5. Don't rely solely on 'good advice'
A smart investor should never invest buy shares of companies he doesn't know much about. Relying on 'advice' from friends is not always a great idea. Do some groundwork yourself.
It doesn't matter who is buying the stock or who is recommending it. Steer clear of such ways of making a fast buck. These tips will land you in a soup.
When you hear of a 'hot tip', dig further.
Take a look at the company's profit and loss statement, which would have been audited by chartered accountants. There is a wealth of information here. To understand the information in a Profit & Loss Account, read Want to buy a stock? Read this first.
Do some basic calculations on your own. The Earnings Per Share (net profit/ number of shares) and Price/Earnings ratio (market price/ EPS) should give you a fair understanding. Read How to spot a good stock to understand what these ratios mean and how to use them.
These tips should get you started. Tread cautiously though. If stocks intimidate you, consider a diversified equity fund.
A mutual fund manager will research many companies before investing in their shares. This way, you can participate in the stock market even as you leave the research to professionals.
Buying shares for the first time?
Got your first paycheck and can't wait to buy your first lot of shares?
Hold on!
Before you start investing in the stock market, you have to get certain basics in place.
Follow this checklist to ensure you are on track.
Should you buy shares now?
1. Get a broker
People like you and me cannot just go to a stock exchange and buy and sell shares.
Only the members of the stock exchange can. These members are called brokers and they buy and sell shares on our behalf.
So, if you want to start investing in shares, you can do it only through a broker.
Every stockbroker has to be registered with the Securities and Exchange Board of India, which is the stock market regulator.
You can either choose a broker (who is directly registered with SEBI) or a sub-broker (people licensed by brokers to work under them).
The Bombay Stock Exchange directory or the National Stock Exchange Web site will give you a list of brokers affiliated to them. Most of them entertain retail clients.
If you want an online broker, you can start by looking at the Web sites of some well-known online players: Sharekhan, Kotak Securities, ICICI Direct, 5paise and India Bulls.
How to sell shares at the right time
2. Get a demat account
Gone are the days when shares were held as physical certificates.
Today, they are held in an electronic form in demat accounts.
Demat refers to a dematerialised account.
Let's say your portfolio of shares looks like this: 40 shares of Infosys, 25 of Wipro, 45 of HLL and 100 of ACC.
They will show in your demat account. You don't have to possess any physical certificates showing you own these shares. They are all held electronically in your account.
Periodically, you will get a demat statement telling you what shares you have in your demat account.
How to get a demat account
To get a demat account, you will have to approach a Depository Participant.
A depository is a place where an investor's stocks are held in electronic form.
There are only two depositories in India -- the National Securities Depository Ltd and the Central Depository Services Ltd.
The depository has agents who are called Depository Participants. In India, there are over a hundred DPs.
Think of it like a bank. The head office, where all the technology rests and the details of all the accounts are held, is like the depository. The DPs are like the branches of banks that cater to individuals.
A broker, however, is not similar to a DP. A broker is a member of the stock exchange and he buys and sells shares for his clients and for himself. A DP, on the other hand, gives you an account where you can hold those shares.
To get a list of the registered DPs, visit the NSDL and CDSL Web sites.
5 rules when buying stocks
3. Get a PAN
The taxman demands that you get yourself a Permanent Account Number.
This is a unique 10-digit alphanumeric number (AABPS1205E, for example) that identifies and tracks an individual in the taxman's database.
Almost every money transaction demands the use of a PAN. These include:
~ When you get a job
~ When you file an income tax return
~ When you open a bank account
~ When you deposit cash of Rs 50,000 or more in a bank
~ When you open a bank fixed deposit of Rs 50,000 or more
~ When you open a post office deposit of Rs 50,000 or more
~ When you buy/ sell shares and mutual funds
~ When you buy/ sell property
~ When you buy a vehicle
~ When you take a loan: home/ personal/ other
~ When you install a telephone (or buy a cell phone)
~ When you pay in cash to hotels and restaurants against bills for an amount exceeding Rs 25,000 at a time
~ You also need to mention it in every transaction you have with the tax officials.
If you are going through a tax consultant, you need not worry. He will supply you with Form 49A (the application form for the PAN number) and give you a list of the documents he needs.
However, if you believe in doing things on your own, the process is really not that tedious.
You could visit the official Web sites of the Income Tax department or UTI Investor Services Ltd or National Securities Depository Limited.
Download Form 49A from any of these sites and follow the instructions.
You should get your PAN in the form of a laminated card within a month.
3 stock market mistakes to avoid
4. Check if you need a UIN
This depends on how much you plan to invest.
The Unique Identification Number is the identification an investor needs to buy and sell shares or mutual fund units.
It is part of the Security and Exchange Board of India's attempt to create a database of all Market Participants and Investors, called MAPIN.
Who needs a UIN?
An investor who is involved in a single transaction of Rs 1,00,000 or more will have to quote his/ her UIN.
If you plan to be a prominent stock market player or a mutual fund investor and expect to deal with such huge amounts in the near future, you should get a UIN.
SEBI has appointed the National Securities Depositories Ltd that, in turn, has appointed Points Of Service agents. The NSDL Web site has a list of the POS agents.
Visit the office of a POS agent. Make sure you take an appointment before you go. As part of the application process, your fingerprints will be scanned and a photograph taken.
All you have to do is fill and submit an application form (there are separate forms for corporates and individuals). You can also download the form for an individual at the NSDL Web site.
Incidentally, the UIN is totally different from a PAN. The Permanent Account Number is an identification number for filing your income tax returns.
How I missed making a killing in the market
Now that you have all this in place, you're ready for the stock market. All the best!
Hold on!
Before you start investing in the stock market, you have to get certain basics in place.
Follow this checklist to ensure you are on track.
Should you buy shares now?
1. Get a broker
People like you and me cannot just go to a stock exchange and buy and sell shares.
Only the members of the stock exchange can. These members are called brokers and they buy and sell shares on our behalf.
So, if you want to start investing in shares, you can do it only through a broker.
Every stockbroker has to be registered with the Securities and Exchange Board of India, which is the stock market regulator.
You can either choose a broker (who is directly registered with SEBI) or a sub-broker (people licensed by brokers to work under them).
The Bombay Stock Exchange directory or the National Stock Exchange Web site will give you a list of brokers affiliated to them. Most of them entertain retail clients.
If you want an online broker, you can start by looking at the Web sites of some well-known online players: Sharekhan, Kotak Securities, ICICI Direct, 5paise and India Bulls.
How to sell shares at the right time
2. Get a demat account
Gone are the days when shares were held as physical certificates.
Today, they are held in an electronic form in demat accounts.
Demat refers to a dematerialised account.
Let's say your portfolio of shares looks like this: 40 shares of Infosys, 25 of Wipro, 45 of HLL and 100 of ACC.
They will show in your demat account. You don't have to possess any physical certificates showing you own these shares. They are all held electronically in your account.
Periodically, you will get a demat statement telling you what shares you have in your demat account.
How to get a demat account
To get a demat account, you will have to approach a Depository Participant.
A depository is a place where an investor's stocks are held in electronic form.
There are only two depositories in India -- the National Securities Depository Ltd and the Central Depository Services Ltd.
The depository has agents who are called Depository Participants. In India, there are over a hundred DPs.
Think of it like a bank. The head office, where all the technology rests and the details of all the accounts are held, is like the depository. The DPs are like the branches of banks that cater to individuals.
A broker, however, is not similar to a DP. A broker is a member of the stock exchange and he buys and sells shares for his clients and for himself. A DP, on the other hand, gives you an account where you can hold those shares.
To get a list of the registered DPs, visit the NSDL and CDSL Web sites.
5 rules when buying stocks
3. Get a PAN
The taxman demands that you get yourself a Permanent Account Number.
This is a unique 10-digit alphanumeric number (AABPS1205E, for example) that identifies and tracks an individual in the taxman's database.
Almost every money transaction demands the use of a PAN. These include:
~ When you get a job
~ When you file an income tax return
~ When you open a bank account
~ When you deposit cash of Rs 50,000 or more in a bank
~ When you open a bank fixed deposit of Rs 50,000 or more
~ When you open a post office deposit of Rs 50,000 or more
~ When you buy/ sell shares and mutual funds
~ When you buy/ sell property
~ When you buy a vehicle
~ When you take a loan: home/ personal/ other
~ When you install a telephone (or buy a cell phone)
~ When you pay in cash to hotels and restaurants against bills for an amount exceeding Rs 25,000 at a time
~ You also need to mention it in every transaction you have with the tax officials.
If you are going through a tax consultant, you need not worry. He will supply you with Form 49A (the application form for the PAN number) and give you a list of the documents he needs.
However, if you believe in doing things on your own, the process is really not that tedious.
You could visit the official Web sites of the Income Tax department or UTI Investor Services Ltd or National Securities Depository Limited.
Download Form 49A from any of these sites and follow the instructions.
You should get your PAN in the form of a laminated card within a month.
3 stock market mistakes to avoid
4. Check if you need a UIN
This depends on how much you plan to invest.
The Unique Identification Number is the identification an investor needs to buy and sell shares or mutual fund units.
It is part of the Security and Exchange Board of India's attempt to create a database of all Market Participants and Investors, called MAPIN.
Who needs a UIN?
An investor who is involved in a single transaction of Rs 1,00,000 or more will have to quote his/ her UIN.
If you plan to be a prominent stock market player or a mutual fund investor and expect to deal with such huge amounts in the near future, you should get a UIN.
SEBI has appointed the National Securities Depositories Ltd that, in turn, has appointed Points Of Service agents. The NSDL Web site has a list of the POS agents.
Visit the office of a POS agent. Make sure you take an appointment before you go. As part of the application process, your fingerprints will be scanned and a photograph taken.
All you have to do is fill and submit an application form (there are separate forms for corporates and individuals). You can also download the form for an individual at the NSDL Web site.
Incidentally, the UIN is totally different from a PAN. The Permanent Account Number is an identification number for filing your income tax returns.
How I missed making a killing in the market
Now that you have all this in place, you're ready for the stock market. All the best!
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