How Does The Stock Market Affect The Economy cover 2

How Does The Stock Market Affect The Economy?

A stock is a type of security that represents an individual’s ownership in a company and a stock market is a place where an investor can buy and sell ownership of such assets.

Trading stock on a public exchange is essential for economic growth as it allows companies to raise capital through public funding, pay off debts or expand the business.

Why do we have a stock market?

The stock market exists for two main reasons, the first is to provide a company with the opportunity to raise capital that can be used to expand and grow the business.

If a company issues one million shares that can sell at $4 a share, this allows them to raise $4 million for the business. Companies find it favorable to raise capital this way so they can avoid incurring debt and paying steep interest charges.

The stock market also provides investors with the opportunity to earn a share in the company’s profit.

One way to do this is to buy stocks and earn regular dividends on its value- that is the investor earns a certain amount of money for each stock they own.

Another way is to sell the stock to buyers for a profit when the price of the stock increases. If an investor buys a share for $20 and the price eventually increases to $25, the investor can sell the stock and realize a profit of 25%.

Also read: Why do Stock Markets Exist? And Why is it So Important?

How the Stock Market affects the Economy?

The increase and decrease in stock prices can influence numerous factors in the economy such as consumer and business confidence which can, in turn, have a positive or negative impact on the economy as a whole. Alternatively, different economic conditions can affect the stock market as well.

Here are a few ways the stock market can affect the economy of a country:

Movements in the Stock Market

The movements in the individual prices of stocks give the stock market a volatile character. As stock prices move up or down, their volatility can have a positive or negative impact on consumers and businesses.

In the event of a bull market or a rise in the prices of stocks, the overall confidence in the economy increases. People’s spending also increases as they become more optimistic about the market. More investors also enter the market and this feeds into greater economic development in the nation.

When the prices of stock fall for a continuously longer period, also known as a bear market, it has a negative effect on the economy. People are pessimistic about the economic conditions and news reports on falling stock prices can often create a sense of panic. Fewer investors enter the market and people tend to invest in lower-risk assets which further depresses the state of the economy.

Also read: What is Bull and Bear market? Stock Market Basics

bull and bear market

(Image credits: 5paisa.com)

Consumption and the Wealth effect

When stock prices rise and there is a bull market, people are more confident in the market conditions, and their investment increases. They tend to spend more on expensive items such as houses and cars. This is also known as the wealth effect which is how a change in a person’s income affects their spending habits and eventually leads to growth in the economy.

In the case of a bear market or a fall in stock prices, there is a negative wealth effect. It creates an environment of uncertainty among consumers and a fall in the value of their investment portfolios decreases spending on goods and services. This affects economic growth as consumer spending is a major component of Gross Domestic Product.

A common situation of the wealth effect was during the US housing market crash of 2008, which had a large negative impact on consumers wealth.

what's the economy

(Image credits: Investopedia)

Impact on Business Investment

Apart from consumer spending, business investment is also a key indicator of economic growth.

When stock prices are high, businesses are likely to make more capital investments due to high market values. Many companies issue an IPO during this time as market optimism is high and it is a good time to raise capital through the sale of shares. There is also more mergers and acquisitions during a bull market and firms can use the value of their stock to buy out other companies. This increased investment feeds into greater economic growth.

When the stock market is bearish, it has the opposite effect on investment. Confidence in the economy decreases and businesses are no longer eager to invest in the economy. The decrease in share price makes it harder for companies to raise funding in the stock market.

Other factors

The stock market also affects the bond market and pension funds. A large part of pension funds are invested in the stock market and a decrease in the price of shares will lower the value of the fund and affect future pension payments. This can lower economic growth as people who depend on pension income will tend to save more and this lowers spending and eventually the GDP.

While a fall in share prices has a negative impact on economic growth and GDP of a nation, it has a positive effect on the bond market. When there is a depression in the stock market, people look for other assets to invest their money in such as bonds or gold. They often provide a better return on investment than shares in the stock market.

Remember, it is always important to diversify your investment portfolio and spread your risk. Don’t throw all your eggs into one basket.

The stock market and the economy are not the same

Contrary to popular belief, the stock market and the economy are two different things. The GDP of an economy and the stock market gains are incompatible and, in fact, there is little comparison between the two. The major reason for this discrepancy is the difference in the size of the two markets. The economy depends on millions of factors that can have both a positive and negative impact, while the stock market is only affected by one factor, the supply and demand of stocks.

Also read:

For investors in the stock market, it is better to err on the side of caution and focus on the fundamentals of each stock rather than on the economy as a whole. As the saying goes ‘an economist is a trained professional paid to guess wrong about the economy’.

January 2, 2019 Economics, Investment Basics No comments yet

The Power of Compounding- Secret of Making Money

The Power of Compounding- Secret of Making Money: Benjamin Franklin once wrote somewhere: ”’tis the stone that will turn all your lead into gold Remember that money is of a prolific, generating nature. Money can beget money, and its offspring can beget more.‘‘

At a very young age, I was introduced to the concept of the power of compounding by my grandfather. He told me a story to explain it better which I am going to narrate here:

One upon a time, there lived an honorable king in a prosperous country. He was well known all over the country for his trustworthy words as he always kept his promise no matter what. Because of this nature of the King, he was widely regarded by people in his kingdom.

All the people in his kingdom were very happy and leading a peaceful life. However, there was a cunning burglar in his capital city. Once, when he was trying to steal some jewels from one of his minister’s house, he was caught red handed. He was presented in front of the King. At that time, the king was playing ‘CHESS’ with one of his minister.
The punishment for stealing in that country was death. Nevertheless, the burglar knew about the honorable nature of the king. He demanded one last wish from the king. The king agreed and said that if it was in his power and good will, he will fulfill his wish.

The burglar said, “O Brave and honorable King! I knew that the punishment for stealing in this country is death. However, I tried to steal some jewels only because I could not see my family suffering from hunger. After I am gone, I just wish them to have enough food to carry on their lives for few days before they manage it themselves.”

Then he further added, “My wish is simple. As I disturbed you while you were playing chess, I want my wish to be related your game. I only wish for one grain of rice for the first square of the chessboard, two grains for the second square, four grains for the third square, eight for the fourth square and so on for all 64 squares.“

The King granted the burglar’s wish without much thinking and regarded it as a small wish. He happily accepted his wish and promised that he will only be prosceuted after his last wish was fulfilled. However, a week later, the king’s treasurer informed the King that even his whole kingdom doesn’t produce as much rice as promised. The quantity of rice promised might not even be produced by combining many countries.

In the end, the King was forced to give his kingdom and all his possessions to the burglar, as he could not keep his promise. That is the power of compounding.

I was amazed when I realized what wonders compounding can do. I still remember my grandfather’s words after the story “The strongest force in the universe is Compound Interest.” Although later, I found out that these words weren’t his words but were originally Einstein’s words. However, hearing this from my grandfather at that young age was quite inspiring.

Another book that I read at a young age- ‘Think and Grow Rich’ by Napoleon Hill. This is the number one self help motivational book that I have came across. I definitely recommend everyone to read this book.

The Power of Compounding:

The power of compounding can be explained as: “Power of compounding is reinvesting or compounding of income on the initial amount invested and also on the accumulated interest over previous years to grow the amount invested year over year.”

Now, you might be thinking what’s so great about the power of compounding. Even a fifth grader knows the term. Yes, you might argue that. However, there are things that the fifth grader doesn’t know and if he understands it, he can set the whole world on fire.

Let’s see how the concept of compounding works. Suppose Rajat invested Rs 1,00,000 at the age of 20 and locks all his investments till retirement. Arvind, however, doesn’t make any investment till he is 40. At 40, he invested Rs 1,00,000 and locks it till the age of 60. The table below tells you how their investments would turn out when they both are 60, assuming that the growth rate is 15 percent per annum. The results are eye-opening.

the power of compounding

On retirement, Rajat will get over Rs 2.6 Crores while Arvind will only get Rs 16 lakhs. Therefore, over 16 Times Growth in the Investment for Rajat compared to Arvind. That’s the power of compounding

Compounding is a simple, but a very powerful concept. Why powerful? Because compounding is similar to a multiplier effect since the interest that is earned by the initial capital also earns an interest, the value of the investment grows at an exponential rate rather than an arithmetic linear rate. The higher the rate of return, the steeper the curve.

Here is a chart of returns on compound interest vs simple interest. The principal amount is Rs 1 lakhs and an annual returns on both simple and compound interest is 15%.

the power of compounding trade brains

I am glad that I received this financial advice at a very young age. This financial knowledge has changed my life and still changing. I hope you understand this concept and the next time you plan to borrow money on credit cards, remember that compounding is working against you.

New to stocks and confused where to start? Here’s an amazing online course for the newbie investors: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your stock market journey today!

May 23, 2017 Investment Basics 5 comments
10 Common Stocks at Rs 100 or less as Market Price

10 Common Stocks at Rs 100 or less as Market Price.

10 Common Stocks at Rs 100 or less as Market Price. Many people think that they require huge lot of money to invest in share market. But it is not so true.There are lots of company in Indian stock market whose market price is even less than the cost of a burger.

There are a number of penny stocks trading between Rs 1 to 10 (find more here). Even, big companies like Ashok leyland, Tata Power, Steel Authority etc are also selling at a market price lower that Rs 100. So, today I am listing the list of such 10 Common Stocks at Rs 100 or less as Market Price.

10 Common Stocks at Rs 100 or less as Market Price

S.No Company Price (In Rs)
1 Idea Cellular 86.70
2 Federal Bank 92.70
3 Ashok Leyland 82.50
4 Tata Power 85.55
5 Crompton Greaves 79.50
6 IDBI Bank 75.10
7 National HyroElectric Power Corporation (NHPC) 32.25
8 Reliance comm 36.80
9 SAIL (Steel Authority India Ltd) 63.85
10 Bombay Dyeing 83.50

Funny, the stock prices of these companies are even less than the Ola or Uber ride fare.  Still people speculate that buying stocks are expensive.

In addition, you can further find a list of large number of stocks, who range from RS 1 to 100  here: http://money.rediff.com/companies/price-sorted/10-100

Disclaimer: Please note that I am not recommending  you to buy these stocks just because their price is low. You should always buy a stock only when its selling at a bargain price. Bargain stocks are not such stocks whose share price is low. Its those stocks which are trading at a much lower than its intrinsic value.

Tags: 10 Common Stocks at Rs 100 or less, Indian stock market 10 Common Stocks at Rs 100 or less as Market Price, 10 Common Stocks at Rs 100 or less as Market Price in India

May 10, 2017 Market, Stocks 2 comments
10 Common Stocks that gave more than 100% return last year

10 Common Stocks that Gave More Than 100% Return Last Year -2017

10 Common Stocks that gave more than 100% return last year. Peter lynch, the legendary investor and fund manager, used to say ‘‘Invest in what you know’’ in his best-selling book “One up on the Wall Street”. By this he means –‘there are a number of common stocks which anyone can find easily around them if they are looking’. You do not need to find a rare petroleum stock which no over has ever heard.  You just have to look around and find some decent companies in your surroundings to invest in.

“Know what you own, and know why you own it.”

“The simpler it is, the better I like it.”

“The worst thing you can do is invest in companies you know nothing about. Unfortunately, buying stocks on ignorance is still a popular American pastime.”

– Peter Lynch

So, toady I have compiled a list of 10 such common stocks which a common people could have found easily while walking in their city or during travelling in the city-bus.

Here is the list of the 10 Common Stocks that gave more than 100 percent return last year. I hope few of them are in your portfolio for over a year.

10 Common Stocks that gave more than 100% return last year.

STOCK 8-May-17 9-May-16 % Change
SENSEX 29926.15 25688.86 16.49
NIFTY 9314.05 7866.05 18.40
INDIAN BANK 352 92.9 278.90
RURAL ELECTRIFICATION 216.6 84.82 155.36
FEDERAL BANK 118.9 49.15 141.91
BAJAJ FINSERV 4409.05 1875 135.14
SUN TV 851 364.5 133.47
PUNJAB NATIONAL BANK 176 82.8 112.56
BANK OF INDIA 185.4 89.35 107.49
INDIAN IOL CORP (IOC) 428.55 209.9 104.16
JAYPEE INFRATECH 14 6.95 101.43
MRF 67501 33650 100.59

Here is the list of other six common stocks that has given more than 50 percent return for the last year.

Best book to learn investing mindset: Rich Dad Poor Dad: What the Rich Teach their Kids About Money that the Poor and Middle Class Do Not!

 I highly recommend you to read this book.

10 Common Stocks that gave more than 50% return last year.

STOCK 8-May-17 9-May-16 % Change
GITANJALI  GEMS 68.75 35.65 92.84
HPCL 531.5 278.5 90.84
MARUTI SUZUKI 6626 3846.5 72.26
YES BANK 1616.25 945.05 71.02
APOLLO TYRES 240.45 157.2 52.95
TATA COMM 652.05 429.08 51.96

 

Tags: 10 Common Stocks that gave more than 100% return last year, List of 10 Common Stocks that gave more than 100% return last year 2016-17

May 8, 2017 Market, Stocks 2 comments
Stock Market Timings in India cover

Stock Market Timings in India.

Stock Market Timings in India. There are two major stock exchanges in India- Bombay stock exchange (BSE) and National stock exchange (NSE). However, the timing of both BSE & NSE is the same.

First of all, you need to know that the stock market in India is closed on weekends i.e. Saturday and Sunday. It is also closed on the national holidays. You can find the list of the holidays of the stock exchange here: NSE India

The normal trading time for equity market is between 9:15 am to 03:30 pm, Monday to Friday.

The trading time for commodity (MCX) market is between 10:00 AM to 11:30 PM, Monday to Friday.

The normal trading time for Agri-community (NCDEX) market is between 10:00 AM to 05:00 PM, Monday to Friday.

In addition, there is no lunch break or tea break in the Indian stock market timings.

The timings of the Indian stock market are divided into three sessions:

  1. Normal session (also called continuous session)
  2. Pre-opening session
  3. Post-closing session

Now, let us discuss all these sessions to further understand their importance in the stock market timings in India.

Also read: Indian Stock Market Holidays 2018

Stock Market Timings in India.

NORMAL TRADING SESSION:

  1. This is the actual time where most of the trading takes place.
  2. Its duration is between 9:15 AM to 3:30 PM.
  3. You can buy and sell stocks in this session.
  4. The normal trading session follows bilateral matching session i.e. whenever buying price is equal to the selling price, the transaction is complete. Here transactions are as per price and time priority.

PRE-OPENING SESSION:

The duration of the Pre-opening session is between 9:00 AM to 9:15 AM. This is further divided into three sub-sessions.

  1. 9:00 AM to 9:08 AM:
    1. This is the order entry session.
    2. You can place an order to buy and sell stocks in this duration.
    3. One can also modify or cancel his orders during this period.
  2. 9:08 AM to 9:12 AM:
    1. This session is used for order matching and for calculating the opening price of the normal session.
    2. You cannot modify or cancel buy/sell order during this time.
  3. 9:12 AM to 9:15 AM:
    1. This session is used as a buffer period.
    2. It is used for the smooth translation of pre-opening session to the normal session.

The opening price of the normal session is calculated using multilateral order matching system. Earlier, the bilateral matching system was used which caused a lot of volatility when the market opened. Later, this was changed to multilateral order matching system to reduce the volatility in the market.

However, most people do not use the pre-opening session and only use the normal session for trading. That’s why there is still huge volatility even in the normal session after the pre-opening session.

The time between 3:30 PM to 3:40 PM is used for closing price calculation.

  1. The closing price of a stock is the weighted average of the prices between 3:00 PM to 3:30 PM.
  2. For the indexes like Sensex & nifty, its closing price is the weighted average of the constituent stocks for the last 30 minutes i.e. Between 3:00 PM to 3:30 PM.

POST-CLOSING SESSION:

  1. The duration of the Post-closing session is between 3:40 PM to 4:00 PM.
  2. You can place orders to buy or sell stocks in the post-closing session at the closing price.If buyers/sellers are available then your trade will be confirmed at the closing price.

NOTE: Pre-opening session and the Post-closing session is only for the cash market. There are no such sessions for future & options.

Overall, the stock market timings in India can be briefed as:

9:00 AM to 9:15 AM Pre-Opening Session
9:15 AM to 3:30 PM Normal Trading Session
3:30 PM to 3:40 PM Closing Price Calculation
3:40 PM to 4:00 PM Post-Closing Session

Stock Market Timings in India

(Pic credit: BSE India)

In addition, if you are unable to trade between this time periods, you can place an AMO (Aftermarket order). There is no actual trading here but you can place your buy or sell order.

Further, the Indian stock market also opens a special trading session during Diwali, the festival of light. This is known as ‘Mahurat Trading’. Its trading time is declared a few days before Diwali. However, generally, Mahurat Trading timing is in the evening. You can find more details about mahurat trading here: 60-minute ‘Muhurat Trading’ on BSE, NSE this Diwali  

BONUS

By the way, if you are new to investing and want to learn how to start investing in the Indian stock market, check out this video. I’m sure it will be helpful to you!

Final Tip: When you enter the share market, you’ll need to open your demat account to start investing/trading. We’ll highly recommend opening an account with Zerodha, No 1 stockbroker in India. Here’s a detailed post on how to open Zerodha account step-by-step. 

That’s all. I hope this post on the ‘Stock Market Timings in India‘ is helpful to the readers. If you have any doubts regarding the Indian stock market timings, feel free to comment below. I will be happy to help you.

May 5, 2017 Investment Basics 20 comments
6 Reasons Why Most People Lose Money in Stock Market cover

6 Reasons Why Most People Lose Money in Stock Market

6 Reasons why most people lose money in stock market. Many a time while watching the market news you hear the words like ‘Oh, the market is bullish’, ‘Sensex went up 100 points’, ‘Nifty banks are doing great this year’ etc. Then you see your portfolio and talk to yourself ‘Why the hell am I losing money?’

Don’t worry. This is not just your scenario. It is a known fact that about 90% of people lose money in the stock market. But do you know why? Why your portfolio is at a loss when the market is upward, why most of the stocks you bought are underperforming;  why aren’t you able to beat the market? If you go through all these thoughts, then you are one of those 90% people.

So, today I am going to give you top 6 reasons why most people lose money in the stock market. Be with me for the next couple of minutes to uncover this mystery.

6 Reasons why most people lose money in stock market

1. Not doing enough research and investing based on ‘TIPS’.

why people lose money in stock market 1

This is the first and the biggest mistake that people do when they start investing in the stock market. They easily trust the tips they hear from a friend, colleague or from a financial magazine that they just read. Moreover, most people blindly follow the recommendations from their brokerage firm which later turn out to be a major loss on their investment.

Now, you can argue with me that what’s wrong with taking tips and suggestion. Your friends and the brokerage firm has more experience than you and surely can help you in getting good returns. But if you think like that, then you are missing the point. No one else cares about your money more than you do. You can easily rule out the broker’s recommendations as they will only earn when you trade. They don’t care whether you win or lose.  They are getting their brokerage fee as long as you are buying or selling. Hence, they will always try to give you suggestions so that you can trade more and frequent. And the more you trade, the more brokerage fee they will get.

Now, let’s come to the suggestions from the friends and colleagues.  There are few things that a beginner should understand that no one is going to tell them. First, All your friends will always boast about their profits & returns. Second, none of your investor friends will tell you about their losses and bad investments. It’s sometimes a matter of pride. Overall, you will think that your friends or colleagues are always doing great, but they are not. You might take their suggestion thinking that they have researched a lot about that company and they are always right in investing. However, in the end, you will end up losing your money.

Hence, the only way to invest intelligently is by doing enough research before investing. Moreover, it’s not tough to research the company on your own. Finding an undervalued stock is an art which you can develop with practice and patience.

2. Trying to make money quickly

why people lose money in stock market 2

This is the second biggest mistake that people make while investing in stock market. People are always in a hurry to make money. They always want to become rich quickly. Always want to be like ‘Warren Buffett’ – Rich and Powerful. However, what they don’t understand is that Mr Warren Buffett has made the majority of his fortune after his 50’s. It’s a fact that he got more than 90 percent of his wealth after the age of 50 and has accumulated a large sum through his long-term investments for a period of over 5 decades. Success in stock market needs time and patience.

But this is not how the people invest. They enter the market. Then select a stock which they heard on a news channel that ‘It has a huge growth potential’ and they invest heavily in it. Then they pray that their money becomes 5-10 times. However, it turns out that they lost 30-40% of their investment. So, out of frustration, they quit investing in stocks and start searching for another way that can make them rich quickly. This is how the non-achiever in stock market thinks and loses money in the market.

If you want to read, I will highly reccomend you to read the book: One Up On Wall Street: How To Use What You Already Know To Make Money In the Market. This is my favourite book on stock market.

3. Sudden overexposure to market and non-diversification

why people lose money in stock market 3

This happens a lot of time in the stock market. A common person has accumulated a lot of savings over the period. Then he hears how his neighbour has doubled his money by investing in the stock market. Suddenly he also gets interested in share market. He started thinking that if his neighbor who is a Salesman, can get so many returns from the stock market, then why can’t he? Hence, he decides to enter the stock market with a huge amount of money that he has saved during all those years of hard working.

And this is where he fails. The point is, you can enter stock market whenever you want; however, to enter the market without prepared it totally stupid. Think of this like going to the forest without knowing how to hunt. You need to develop the art first. You need to understand the market and enter once you are at least a little prepared.

In addition, non-diversification is also one of the biggest mistakes that most people do. People are so confident about their stocks that they think it’s illogical to invest in multiple stocks which may average out the profits. True, it might average out the profits; but it also reduces the risk. Remember, it’s always about minimizing risk and maximizing the profits. Like over-diversification minimizes the profits, in the same way, non-diversification maximizes the risk.

4. Holding onto losses while booking profits early

why people lose money in stock market 4

Let us imagine a scenario. You have bought 5 shares. Three of them are doing great while two of them are underperforming. What will you do? What will you sell first? The shares that are doing great or the one who is defeating?

‘Sell the winners and hand on to the loser stocks’. The majority of the amateur investors follow this rule. They think that it’s safe to sell the stocks first which are giving them good profits and hold the loser stocks. In this way, the loser stocks will get time to recover and they might get their initial investment back. Moreover, in the meantime, they can get some profits by selling their good stocks.

However, this is the wrong approach. In this way, you are limiting your upper level and increasing your lower level. That is, you are limiting how much you can get profits as you have already sold your good stocks. But, you can suffer even great loss as the loser stocks are still in your portfolio.

If you want not to lose money in the stock market, then you should use the opposite approach. You should limit your lower level and maximize your upper lever. This can be achieved by holding to your winners and cutting your loser stocks.

5. Lack of patience

why people lose money in stock market 5

Patience is the key to success in stock market. The only thing that you need to do in the stock market is to buy good stocks and give it time. This is the only way to make money here.

However, most people who lose money in the stock market do not have patience. Although many of these people are able to find a good stock, they aren’t able to get good profits from them. Why? Because they don’t have patience. They can’t even give 2-3 years time to their stocks to grow. They want a quick result.

However, this is not the only problem with such investors. In some situations when their stocks lose 20-30% of its worth, they become highly impatient and sell their stock quickly. If just they have held their stocks for a couple of months, they could have got good returns of around 40-50% on their investments. Here, the lack of patience misfires on their intelligence of choosing a decent stock.

6. Blindly following the crowd.

why people lose money in stock market 6

This is the last reason that I want to mention that why people lose money in stock market. BLINDLY FOLLOWING THE CROWD.

Imagine a scenario. Your neighbour bought a stock which increased its value by 50% in few days. Then you colleague bought the same stock and the stock has now risen to around 80% appreciation from its initial value. Everyone is talking about that stock and it’s making a lot of noise in the news. What will you do now? All your known people are getting great returns by investing in that stock. Will you invest in that stock too?

If you blindly follow everyone and buy that stock, then you are most likely to lose money. Everyone has some plans and strategies for their investment.  You just can’t read the exit strategy of your neighbour. Maybe when you thought to buy, he was planning to sell the stock in a few days thinking it as overpriced. But you just can’t know this.

What you can do is to read about the company’s fundamentals, its financial reports and figuring out why is it in news so much. And after studying the company completely, if you are satisfied, then only invest in that stock. NEVER INVEST BLINDLY FOLLOWING THE CROWD.

BONUS VIDEO:

Apart from the above, there are other couples of reasons also like investing in futures and options, frequent trading, lack of self-control etc that are responsible for most people losing money in stock market.

I hope this post about ‘6 Reasons why most people lose money in stock market’ is useful for the readers. If you have any suggestions or reviews, feel free to comment below. I will be happy to reply.why people lose money in stock market 7

Besides, here is an infographic on why most people lose money in stock market. Feel free to share it with your friends so that they can also avoid loss in the market.

why most People lose money in stock market

New to stocks and confused where to start? Here’s an amazing online course for the newbie investors: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your stock market journey today!

Tags: 6 Reasons why most people lose money in stock market, reasons people lose money in stock market, Common reasons why most people lose money in stock market, why most people lose money in stock market, why 90% people lose money in stock market

May 3, 2017 Investment Basics 28 comments
10 Reasons To Start Investing In Stock Market Today

10 Reasons To Start Investing In Stock Market Today.

10 Reasons to start investing in stock market. Most of the people at some time have thought to start investing in stock market. However, they are afraid to take next steps as they have always heard how a closed kin or Uncle has lost almost all his money in stock market.

Since, a very long time our family members, friends and media have told us to stay away from the market. The common misconception that ‘Stock investing is like GAMBLING’ has become more of a fact than myth. Moreover, maybe this could be the reason why even less than 2% population of India is actively investing in the stock market.

Hence, today I am going to give you 10 great reasons to break this barrier and start investing in stock market. So, be with me for the next few couple of minutes to enjoy this roller coaster ride that may open your eyes towards investing in stock market.

Top 10 reasons to start investing in stock market.

1. To keep pace with inflation:

Inflation is a state where the prices are rising and value of purchasing power of money is decreasing. Inflation occurs in an economy when there is an expansion of the total amount of money. Overall, Inflation is not desirable for an economy.

Let us understand inflation with an example. Suppose you have Rs 5 lakhs in your account and you want to buy a car, which also costs Rs 5 lakhs currently. Then you changed your mind, deciding to buy the car next year, and kept your money in the saving account. The bank is giving you a decent interest of 5% pa. Now, let us fast forward to next year. You went to the bank and came home happily with your money that has become Rs 5.25 lakhs now. Then you went to the car showroom. But boom! You get the shock. The price of that car has now increased to Rs 5.3 lakhs. The car, which you could have easily bought last year, is now not affordable to you. That is inflation.

The inflation in India for last few years has been around 4-5%. The return on the saving account (Interest rate) is around 4-6% per annum. Hence, a saving account cannot beat the inflation. Overall, if you want to beat the inflation, you have to invest your money intelligently. And the stock market is the best place for intelligent investors. If you buy stocks of decent companies, you can easily get a return of between 10-25% depending on how good the stock is and how much time you invested in choosing the stock. Therefore, investing in stock market is a great option if you want to keep pace with the rising inflation.

2. Most growth potential:

For the past couple of decades, Stocks and real estate are the two investments, which have constantly beat all other forms of investment. Whether it is bonds or commodities like gold, silver, petroleum etc. stock market has been able to outperform all these investments with the best returns on the investments. Hence, with the tremendous growth potential in the stock market, it is always advisable to invest in stocks.

3. Investing makes your money work for you:

Money is important. We need money in every aspect of life. Most people say that they do not work for money and money is the cause of most problems. However, lack of money is the cause of most problems and investing is the solution to this problem. If you invest your money in good companies, you just have to sit idly and do nothing. Your money will grow itself as the company prospers. In the meanwhile, when your money is growing by itself, you can use your time in whatever way you want. In this way, you can make your money work for you.

4. Stock Investing takes as little amount as buying a burger:

There is a common misconception among many people that they need a huge sum to start investing in the stock market. However, that is not true. You can start investing with as little money as required to buy a burger. There are a number of stocks whose price is less than Rs 100. You can invest an even very small amount of money and start getting good returns. This option is not available in other for other forms of investments like gold or real estate. In addition, remember a little bit of things everyday ads up to a big result.

5. You do not need to be a genius to invest in the stock market:

‘If you can understand 5th standard math, then you can understand stock market’- Peter Lynch.

Lynch is one of the most renowned fund managers famous for giving around 30% return for a continuous period of 13 years at Fidelity. He always motivates common people to invest in stocks and believes the stock market is for everyone. You do not need to be a mastermind or rocket scientist to invest in stock market. Unlike starting most business or start-ups, the stock market requires only a little money, math, time and interest. Anyone can get huge returns by investing in the stock market.

If you are new to investing and want to stay away from common myths and mistakes in stock market, I will highly recommend you to read this book: One Up On Wall Street: How To Use What You Already Know To Make Money In the Market. It is one of my favourite books on stock market.

6. Stock investing is a lot easier now:

It is easy to invest in stocks in India now and hardly requires any expertise to buy stocks online. Trading with the online brokerage account is a lot simpler now. Moreover, with the increase in financial websites and apps; finding and selecting stocks is also easy now. You do not need to go through all the boring financial newspaper and magazines now and need not to rely on newsletters to get companies financial reports now. Now, you can easily find them on the company’s website or on the financial websites.

7. Tax benefits from the government:

There are a number of tax benefits in investing in stock market. India has the provisions of tax-free return from equity, in case share is held for more than 1 year. The long-term capital gains tax in India is zero. From the updated rules in Budget 2018, the long-term capital gain tax is 10% for gains exceeding Rs 1 lakh. Still, this is better than the return of 6.5% from FDs, which is again taxable up to 10-30% depending on your tax slab. That’s why it is a popular quote- ‘The rich pay less tax’.

8. You do not have to dig deep.

Everyone knows about Eicher motors, the parent company of ‘Royal Enfield’. The company makes famous ‘bullet’ bikes. Many old and young people have a dream to own a ‘bullet’. If only people have bought a large volume of stocks of ‘Eicher motors’ when it launched the ‘Royal Enfield’ bikes, they would have been a millionaire by now. Eicher motors have given around 129,000% return since 2002; The price appreciated from Rs 22 (in September 2000) to Rs 29,000 current price (May 2017).

There are a number of other examples of common stocks as well that has given more than several hundred percents returns over the last few years. For example, Symphony, Suzuki, HPCL, Titan Company etc. These companies are well-known to the common people. Overall, people can easily find such growing companies around them. Even a famous company like Titan can give you great returns. You are not supposed to find a very rare and un-heard petroleum or metal company. You just have to be willing to look around enough and notice them.

9. To create a secondary source of income:

It has always been taught in our school- ‘Get a high paid safe and secure job’. What is not taught is what will happen if the company is shut down or you are fired. We should always have a backup. For public in India, stocks help to create this additional source of income. Most of the people are entirely busy with their office their entire life. For those people, Investing in the stock market can be their second source of income. Through the value appreciation and dividends, they can steadily grow additional income. That is why people need to start investing in stock market.

10. The power of compound interest:

Stock Investing allows you to take advantage of compound interest, which grows your wealth exponentially. Most of the bank savings account gives you a linear simple interest. However, with investing in stock, you can get compounded returns. The famous scientist Albert Einstein once said- “Compounding is the eighth wonder of the world”. The world greatest investor, Warren Buffett, is known to have a compounded return of around 22% for the last 5 decades. Moreover, this compounded return for a long time has made him one of the richest men on earth. The power of compounding is one of the major reasons why people should invest in stock market.

Apart there 10 reasons, there are also other couples of reasons to start investing in stock market. Nevertheless, they are out of the scope for the beginners and you can only realize them once you enter the stock market world.

I hope the post is useful for the readers. If there is an additional reason to invest in the stock market that I missed or you want to add to the list, feel free to comment below. I will be happy to include them also. Happy investing!

New to stocks and confused where to start? Here’s an amazing online course for the newbie investors: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your stock market journey today!

Tags: 10 Reasons to start investing in stock market, Reasons to start investing, Reasons to start investing in stock market, top reasons to start investing,

May 2, 2017 Investment Basics 6 comments
Fundamentals of stock market- key financial ratios

The Fundamentals of Stock Market- Must Know Terms

Here are the few key financial terms that a stock market investor must know. Although the list is long, it will be worth to know these terms to get a good grasp on the fundamentals. Here it goes:

Promoter’s shares: – The company shares that are owned by the promoters i.e. the owners of the company is called Promoters shares. The public cannot own these shares.

Outstanding shares: The company’s shares that are owned by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders.

Public (retail investors), foreign institutional investors (FII), Domestic institutional investors (DII), mutual funds etc. can own outstanding shares.

Market Capitalization: – Market Cap or Market capitalization refers to the total market value of a company’s outstanding shares. It is calculated by multiplying a company’s shares outstanding by the current market price of one share. The investment community uses this figure to determine a company’s size, as opposed to using sales or total asset figures. In general, market capitalization is the market value of company outstanding shares.

Market Capitalization = No of outstanding shares * share value of each stock

Book value: – It is the ratio of total value of company assets to the no of shares. In general, this is the value which the shareholders will get if the company is liquidated. Hence, it is always preferred to buy a stock with high book value compared to the current share price.

Book Value = [Total assets – Intangible assets (patents, goodwill..) – liabilities]

Earnings Per Share (EPS): This is one of the key ratios and is really important to understand before we study other ratios. EPS is the profit that a company has made over the last year divided by how many shares are on the market. Preferred shares are not included while calculating EPS. In general, Money earned per outstanding shares.

Earnings Per Share (EPS) = (Net income – dividends from preferred stock)/(Total outstanding shares)

From the perspective of an investor, it is always better to invest in a company with higher EPS as it means that the company is generating greater profits.

Price to Earnings Ratio (P/E):  The Price to Earnings ratio is one of the most widely used financial ratio analysis among the investors for a very long time. A high P/E ratio generally shows that the investor is paying more for the share. As a thumb rule, a low P/E ratio is preferred while buying a stock, but the definition of ‘low’ varies from industries to industries. So, different sectors (Ex Automobile, Banks etc) have different P/E ratios for the companies in their sector, and comparing the P/E ratio of the company of one sector with P/E ratio of the company of another sector will be insignificant. However, you can use the P/E ratio to compare the companies in the same sector, preferring one with low P/E. The P/E ratio is calculated using this formula:

Price to Earnings Ratio= (Price Per Share) / ( Earnings Per Share)

It’s easier to find the find the price of the share as you can find it from the current closing stock price. For the earning per share, we can have either trailing EPS (earnings per share based on the past 12 months) or Forward EPS (Estimated basic earnings per share based on a forward 12-month projection. It’s easier to find the trailing EPS as we already have the result of the past 12 month’s performance of the company.

If you want to read further in details, I will recommend you to read this book: Everything You Wanted to Know About Stock Market Investing -Best selling book for stock market beginners. 

Price to Book Ratio (P/B): Price to Book Ratio (P/B) is calculated by dividing the current price of the stock by the latest quarter’s book value per share. P/B ratio is an indication of how much shareholders are paying for the net assets of a company. Generally, a lower P/B ratio could mean that the stock is undervalued, but again the definition of lower varies from sector to sector.

Price to Book Ratio = (Price per Share)/( Book Value per Share)

Dividend yield: – It is the portion of the company earnings decided by the company to distribute to the shareholders. A stock’s dividend yield is calculated as the company’s annual cash dividend per share divided by the current price of the stock and is expressed in annual percentage. It can be distributed quarterly or annually basis and they can issue in the form of cash or stocks.

Dividend Yield = (Dividend per Share) / (Price per Share)*100

For Example, If the share price of a company is Rs 100 and it is giving a dividend of Rs 10, then the dividend yield will be 10%. It totally depends on the investor whether he wants to invest in a high or a low dividend yielding company.

Also Read: 4 Must Know Dates for a Dividend Stock Investor

Market lot: – It is the minimum no of shares required to purchase or sell to carry a transaction.

Face value: – It is the price of the stock written in the company’s books when issued during IPO. It is the amount of money that the holder of a debt instrument receives back from the issuer on the debt instrument’s maturity date. Face value is also referred to as par value or principal.

Dividend % – This is the ratio of the dividend given by the company to the face value of the share.

Basic EPS: – This is nothing but Earnings per share.

Diluted EPS: – If all the convertible securities such as convertible preferred shares, convertible debentures, stock options, bonds etc. are converted into outstanding shares then the Earnings per share is called Diluted earnings per share. The less the difference between Basic and diluted EPS the more the company is preferable.

Cash EPS: – This is the ratio of cash generated by the company per diluted outstanding share. If Cash EPS is more the more the company is preferred.

Cash EPS  = Cash flows / no of diluted outstanding shares

PBDIT:  Profit before depreciation, interest, and taxes.

PBIT: – Profit before interest and taxes

PBT: – Profit before taxes

PBDIT margin: – It is the ratio of PBDIT to the revenue.

Net profit margin: – It is the ratio of Net profit to the revenue.

Assets: – Asset is an economic value that a company controls with an expectation that it will provide future benefit.

Liability: It is an obligation that the company has to pay in future due to its past actions like borrowing money in terms of loans for business expansion purpose.

Assets = Liabilities + Shareholders equity

Asset turnover ratio: – It is calculated by dividing revenue to the total assets

Debt to Equity Ratio: The debt-to-equity ratio measures the relationship between the amount of capital that has been borrowed (i.e. debt) and the amount of capital contributed by shareholders (i.e. equity). Generally, as a firm’s debt-to-equity ratio increases, it becomes riskier A lower debt-to-equity number means that a company is using less leverage and has a stronger equity position.

Debt to Equity Ratio =(Total Liabilities)/(Total Shareholder Equity)

Return on Equity (ROE): Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders has invested. In other words, ROE tells you how good a company is at rewarding its shareholders for their investment.

Return on Equity = (Net Income)/(Average Stockholder Equity)

Price to Sales Ratio (P/S): The stock’s price/sales ratio (P/S) ratio measures the price of a company’s stock against its annual sales. P/S ratio is another stock valuation indicator similar to the P/E ratio.

Price to Sales Ratio = (Price per Share)/(Annual Sales Per Share)

The P/S ratio is a great tool because sales figures are considered to be relatively reliable while other income statement items, like earnings, can be easily manipulated by using different accounting rules.

Current Ratio: Current ratio is a key financial ratio for evaluating a company’s liquidity. It measures the proportion of current assets available to cover current liabilities. It is a company’s ability to pay its short-term liabilities with its short-term assets. If the ratio is over 1.0, the firm has more short-term assets than short-term debts. But if the current ratio is less than 1.0, the opposite is true and the company could be vulnerable

Current Ratio = (Current Assets)/(Current Liabilities)

Quick ratio:  The name itself tells quick means how well the company can meet its short-term financial liabilities.  The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.

Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities.

Note: This content is published by a guest author- Anjani Badam.

April 26, 2017 Investment Basics 9 comments
8 Financial Ratio Analysis that Every Stock Investor Should Know cover

8 Financial Ratio Analysis that Every Stock Investor Should Know

8 Financial Ratio Analysis that Every Stock Investor Should Know. The valuation of a company is a very tedious job. It’s not easy to evaluate the true worth of a company as the process takes the reading of company’s several years’ financial statements like balance sheet, profit and loss statements, cash-flow statement, Income statement etc.

Although it really tough to go through all these information, however, there are various financial ratios available which can make the life of a stock investor really simple. Using these ratios they can choose right companies to invest in or to compare the financials of two companies to find out which one is better.

This post about ‘8 Financial Ratio Analysis that Every Stock Investor Should Know’ is divided into two parts. In the first part, I will give you the definitions and examples of these 8 financial ratios. In the second part, after financial ratio analysis, I will tell you how and where to find these ratios. So, be with me for the next 8-10 minutes to enhance your financial knowledge.

So, let’s start the first part of this post with the financial ratio analysis.

If you are a beginner and want to learn stock market, I will highly recommend you to read this book first: Everything You Wanted to Know About Stock Market Investing

Quick note: You don’t need to worry about how to calculate these ratios or remember the formulas by-heart, as it will be already given in the financial websites. However, I will recommend you to go through this financial ratio analysis as it’s always beneficial to have good financial knowledge.

financial ratio analysis trade brains

Financial Ratio Analysis that Every Stock Investor Should Know:

  1. Earnings Per Share (EPS):

    This is one of the key ratios and is really important to understand Earnings per share (EPS) before we study other ratios. EPS is basically the profit that a company has made over the last year divided by how many shares are on the market. Preferred shares are not included while calculating EPS.

    Earnings Per Share (EPS) = (Net income – dividends from preferred stock)/(Average outstanding shares)

    From the perspective of an investor, it’s always better to invest in a company with higher EPS as it means that the company is generating greater profits. Also, before investing in a company, you should check it’s EPS for the last 5 years. If the EPS is growing for these years, it’s a good sign and if the EPS is regularly falling or is erratic, then you should start searching another company.

  2. Price to Earnings Ratio (P/E)

    The Price to Earnings ratio is one of the most widely used financial ratio analysis among the investors for a very long time. A high P/E ratio generally shows that the investor is paying more for the share. As a thumb rule, a low P/E ratio is preferred while buying a stock, but the definition of ‘low’ varies from industries to industries. So, different sectors (Ex Automobile, Banks etc) have different P/E ratios for the companies in their sector, and comparing the P/E ratio of the company of one sector with P/E ratio of the company of another sector will be insignificant. However, you can use P/E ratio to compare the companies in the same sector, preferring one with low P/E. The P/E ratio is calculated using this formula:

    Price to Earnings Ratio= (Price Per Share)/( Earnings Per Share)

    It’s easier to find the find the price of the share as you can find it at the current closing stock price. For the earning per share, we can have either trailing EPS (earnings per share based on the past 12 months) or Forward EPS (Estimated basic earnings per share based on a forward 12-month projection. It’s easier to find the trailing EPS as we already have the result of the past 12 month’s performance of the company.

  3. Price to Book Ratio (P/B)

    Price to Book Ratio (P/B) is calculated by dividing the current price of the stock by the latest quarter’s book value per share. P/B ratio is an indication of how much shareholders are paying for the net assets of a company. Generally, a lower P/B ratio could mean that the stock is undervalued, but again the definition of lower varies from sector to sector.

    Price to Book Ratio = (Price per Share)/( Book Value per Share)

  4. Debt to Equity Ratio

    The debt-to-equity ratio measures the relationship between the amount of capital that has been borrowed (i.e. debt) and the amount of capital contributed by shareholders (i.e. equity). Generally, as a firm’s debt-to-equity ratio increases, it becomes riskier A lower debt-to-equity number means that a company is using less leverage and has a stronger equity position.

    Debt to Equity Ratio =(Total Liabilities)/(Total Shareholder Equity)

    As a thumb of rule, companies with a debt-to-equity ratio more than 1 are risky and should be considered carefully before investing.

  5. Return on Equity (ROE)

    Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. ROE measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders has invested. In other words, ROE tells you how good a company is at rewarding its shareholders for their investment.

    Return on Equity = (Net Income)/(Average Stockholder Equity)

    As a thumb rule, always invest in a company with ROE greater than 20% for at least last 3 years. A yearly increase in ROE is also a good sign.

  6. Price to Sales Ratio (P/S)

    The stock’s price/sales ratio (P/S) ratio measures the price of a company’s stock against its annual sales. P/S ratio is another stock valuation indicator similar to the P/E ratio.

    Price to Sales Ratio = (Price per Share)/(Annual Sales Per Share)

    The P/S ratio is a great tool because sales figures are considered to be relatively reliable while other income statement items, like earnings, can be easily manipulated by using different accounting rules.

  7. Current Ratio

    The current ratio is a key financial ratio for evaluating a company’s liquidity. It measures the proportion of current assets available to cover current liabilities. It is a company’s ability to pay its short-term liabilities with its short-term assets. If the ratio is over 1.0, the firm has more short-term assets than short-term debts. But if the current ratio is less than 1.0, the opposite is true and the company could be vulnerable

    Current Ratio = (Current Assets)/(Current Liabilities)

    As a thumb rule, always invest in a company with a current ratio greater than 1.

  8. Dividend Yield

    A stock’s dividend yield is calculated as the company’s annual cash dividend per share divided by the current price of the stock and is expressed in annual percentage.

    Dividend Yield = (Dividend per Share)/(Price per Share)*100

    For Example, If the share price of a company is Rs 100 and it is giving a dividend of Rs 10, then the dividend yield will be 10%. It totally depends on the investor whether he wants to invest in a high or a low dividend yielding company.

    Also Read: 4 Must-Know Dates for a Dividend Stock Investor

If you want to read further in details, I will recommend you to read this book: Everything You Wanted to Know About Stock Market Investing -Best selling book for stock market beginners. 

Now that we have completed the key financial ratio analysis, we should move towards where and how to find these financial ratios.

For an Indian Investor, you these are 3 big financial websites where you can find all the key ratios mentioned above along with other important financial information:

I, generally use money control to find the key financial ratio analysis. The mobile app for Money control is also very efficient and friendly and I will recommend you to use the mobile app.

Now, let me show you how to find these key ratios in Money Control. Let’s take a company, Say ‘Tata Motors’. Now, we will dig deep to find all the above-mentioned rations.

Financial ratio analysis -Steps to find the Key Ratios in Money Control:

  • Open http://www.moneycontrol.com/ and search for ‘Tata Motors’.
    financial ratio analysis 3
  • This will take you to the Tata Motor’s stock quote page.
    Scroll down to find the P/E, P/B, and Dividend Yield.
    financial ratio analysis 4financial ratio analysis 2
  • Now go to the ‘Financials’ tab and select ‘Ratio’ option [i.e. Financial  Ratio]
    Scroll down to find all the remaining financial ratios.
    financial ratio analysis 5

That’s all! These are the steps to do the key financial ratio analysis. Now, let me give you a quick summary of all the key financial ratios mentioned in the post.

Summary:

8 Financial Ratio Analysis that Every Stock Investor Should Know:

  1. Earnings Per Share (EPS) – Increasing for last 5 years
  2. Price to Earnings Ratio (P/E) – Low compared to companies in the same sector
  3. Price to Book Ratio (P/B) – Low compared companies in the same sector
  4. Debt to Equity Ratio – Should be less than 1
  5. Return on Equity (ROE) – Should be greater than 20% 
  6. Price to Sales Ratio (P/S) – Smaller ratio (less than 1) is preferred
  7. Current Ratio – Should be greater than 1
  8. Dividend Yield – Depends on Investor/ Increasing preferred

In addition, here is a checklist (that you should download) which can help you to select a fundamentally strong company based on the financial ratios.

Feel free to share this image with ones whom you think can get benefit from the checklist.

5 simple financial ratios for stock picking

I hope this post on ‘8 Financial Ratio Analysis that Every Stock Investor Should Know’ is useful for the readers. If you have any doubt or need any further clarification, feel free to comment below. I will be happy to help you.

April 17, 2017 Investment Basics, Valuations 28 comments
What is the minimum money I need to start stock trading in India

What is the minimum money I need to start stock trading in India?

What is the minimum money I need to start stock trading in India?

This is one of the most asked questions by the beginners when they start investing in stock market. Different newbie investors  ask the same questionin different formats. It goes like this:

What should be the ideal amount to start investing in the Stock Market?

What is the minimum money I need to start stock trading in India?

I want to invest in stock market but I do not know how much to invest?

What should be the minimum amount can I invest in stock market for long term?

I want to invest in stock market, but I don’t have much money. Is there any any minimum number of stocks that I must buy?

The general answer to all these questions is ‘there is no minimum money required to start investing in the stock market in India’.

You can buy stocks for even less than Rs 10 also if you find an interesting one (Indian stock exchanges BSE & NSE has a number of stocks pricing less than even Rs 10). You don’t need to have thousands or lakhs to start trading in India. Any amount from which you can buy a stock is decent enough to start trading, no minimum money to start trading in stock market required.

Here is a list of 10 popular companies whose stock prices are less than Rs 100 (as time of writing this post).

S.No Company Price (In Rs)
1 Idea Cellular 86.70
2 Federal Bank 92.70
3 Ashok Leyland 82.50
4 Tata Power 85.55
5 Crompton Greaves 79.50
6 IDBI Bank 75.10
7 National HyroElectric Power Corporation (NHPC) 32.25
8 Reliance comm 36.80
9 SAIL (Steel Authority India Ltd) 63.85
10 Bombay Dyeing 83.50

You can easily invest in these companies.  Funny, the stock prices of these companies are even less than the Ola or Uber ride fare that you take in your hometown.  Still, people speculate that buying stocks are expensive. In addition, you can also find a complete list of stocks who price range from Rs 1 to 100  here: http://money.rediff.com/companies/price-sorted/10-100

So, the answer to the question of ‘what is the minimum money I need to start stock trading in India?’ is that there is no minimum money limit required for starting stock trading in India.

minimum money I need to start stock trading-2

However, is this all that you wanted to learn from the topic of the post? I don’t think so.

The next big question should be then ‘How much should I invest in the stock initially -if there is no minimum money I need to start stock trading?’.

The answer is that if you are new to the market and still in the learning phase, it is always recommended to start small. Invest as low as possible and focus on learning. Anything between Rs 500- Rs 1000 is good enough. You really don’t want to lose thousand of money at the start of your investment journey (and then promising angrily to yourself that you won’t ever return to the market).

But, this doesn’t mean that you should take this amount as a strict rule for your initial investment. Suppose, if you found a stock, which is bit costlier, say Rs 1200. But you have done your homework, read the stock fundamentals, and are confident that the stock will give a good return in the future, then, you should go for it. Anyways, as a thumb rule for the beginners, anything between Rs 500- Rs 1000 can be used as the first stock market investment amount.

Want to learn more? Here is a best selling book on stock market which I highly recommend to read: Beating the street by Peter Lynch

The best advantage of this thumb rule is that you won’t lose too much if the things don’t work out as you imagined. Maybe, you misinterpreted the stock or did the fundamental study wrong, or the stock price fell due to some bad fortune. Still, you won’t be affected too much financially by the loss. Nonetheless, this investment will teach you a few lessons. As the saying goes:

Failures are the best teachers.

From your first investment, you will learn a lot. Remember, it’s not always about winning. You should always remember this famous quote ‘Sometimes you win, & sometimes you learn’. Further, from your first investment, you will learn more important things. You will learn what things to do and moreover, you will learn what things not to do. Besides, losing a small money won’t affect your morale and you can come back in the game again, and next time even more prepared and informed.

On the other hand, if you win i.e. the stock performed well, then congratulations. You have done a good job! 

Your first investment teaches you a great lesson if it is a failure. On the other hand, if your first stock is a winner, it gives a tremendous joy and becomes a memory for the lifetime. Both ways, you’re gonna receive something. Either a lesson or joy.

For my case, I bought three stocks during my first investment. Out of three, two performed well and the third underperformed for three continuous months. Although the overall portfolio was in profit, still the returns were not as good as I expected. Therefore, I sold the third stock after the third month. (Quick spoiler: The third stock became a multi-bagger in next two year. But, I don’t have any regrets.)

For beginners, I will suggest following their stock portfolio for three-five months before investing heavily in the market. The initial big profits on your stock might give you a great confidence to keep buying additional stocks. But you shouldn’t be greedy at that moment.  You must remember that for beginners, it’s more important to learn how to do value investing, that to earn money. And once you have learned the basics, the game is yours.

Also read :

minimum money I need to start stock trading-4

100 minus your age rule

There is a famous rule regarding how much you should invest in the stock market and widely known as ‘100 minus your age rule’. The rule is based on the principle of gradually reducing your risk as you get older. The rules go like this. ‘The percentage of the stock holding in your net worth should be equal to 100 minus your age.’

For example, Let’s say your age is 20 and your total savings till date is Rs 1000. Then, the amount that you should invest in the stock market should be (100-20) = 80% of your total net worth. In other words, you should invest Rs 800 in the stock market if you are of age 20 from a total saving of Rs 1000.

You can read the complete post about ‘100 minus your age rule’ here.

The X/3 Rule:

This is another popular rule for beginners to reduce the risk while investing. The rule says to invest the only x/3 amount in the beginning if x is the total amount you intended to invest in a stock. After a few weeks, you can invest your next x/3 amount to the stock if it’s doing good. And finally the last x/3 again after another few months.

For example, if you intend to invest Rs 10,000 in a stock, don’t buy from the whole amount all in one go. Invest only 10,000/3=  Rs 3,333 initially. If you find your investment growing, then you can add Rs 3,333 in the next round of investment and the last Rs 3,334 in the final round. The rule greatly minimizes the risk and helps in averaging out the purchase price.

Anyways, a minor problem with this rule it that it reduces the focused amount. Therefore, the final profit might be little less than expected if the whole amount was invested at the same time. Still, it’s a great rule for a stock market beginners and helped a lot of newbies to reduce their risk and losses significantly.

There is one more rule called the ‘75% profit rule’. However, it is more like a hypothesis that a rule. It states that if 75% of stocks in your portfolio are doing good, then you can invest further. For example, if you have bought 4 stocks and 3 of them are doing good, then it means that your strategy is working and you can increase your investment. The chances of all the stocks in your portfolio(4/4) working great is very limited. Even Warren Buffett, the greatest investor of all time, has some stocks in the portfolio which gives him negative returns.

In short, if 75% of your stocks are doing great, it means that your strategy is good and it’s not the luck that is driving your portfolio. In other words, if you have only one stock in your portfolio and its growing fast, there might be a luck factor. But if 7 out of 10 stocks in your portfolio are growing, it’s more because you did your research correctly.

That’s all. These are the basics tips and tricks for the beginners to invest in the stock market.  Also remember the answer to the original question ‘what is the minimum money I need to start stock trading?’ is that there is no minimum money you need to start stock trading. That is no lower limit for that minimum money you need to start stock trading.

One more thing I would like to add to this post. There are also some additional charges while buying a stock online and the buyer has to pay them. They are generally less than 1% of the amount of the transaction. The additional charges are brokerage charge, Service charge, STT etc. Therefore, you also have to keep these charges in mind during buying a stock. Although these are a very small amount, still they will add up in the final amount of the stock that you bought.

Hence, for all those who are asking ‘What is the minimum money I need to start stock trading in India?’, the answer is that there isn’t a minimum money you need to start trading in India. Anything that suits you is good enough for the market. Any money at which you can buy a stock works fine for entering the market. Any amount that you are ready to invest, is great to start stock trading in India.

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Lastly, I hope my post ‘What is the minimum money I need to start stock trading in India’ is useful for the readers. If you need any further clarification or have any doubts, feel free to comment below. I’ll be happy to help you out.

If you are new to stocks and confused where to start, here’s an amazing online course for the newbie investors: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your stock market journey today!

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April 13, 2017 Investment Basics 46 comments

How to buy a stock in Stock Market? Step-By-Step Explanation.

How to buy a stock in stock market? Now a day, buying a stock is as simple as recharging your mobile or transferring money. All you need is a computer with internet connection, a bank account and some money in that account, obviously.

If you have seen movie Guru (in which Abhishek Bachchan was in leading role based on the life of Dhirubhai Ambani), the scenario of the stock market might scare you. But it was something like 50-60 years back. Now, no physical appearance, no much paper works are required. You can buy a stock sitting in your room in front of your laptop and that too within 2 minutes. How? That’s what I am going to teach you now. How to buy a stock in stock market? Just be with me for the next 5-10 minutes.

Buying shares online is the easy task, but I believe first you need to find that right stock that you should buy. There are few basic works which you should go through to find the best stock for you:

Read and Research:

There are tons of websites on the internet where you can get tutorials for stock market basics and about how to buy a stock in Stock Market? For beginners, I will recommend following websites of moneycontrol, economic times and Investopedia – Sharper Insight. Smarter Investing, Learn how to follow Stock Market and trends- Trade Brains

There are few books which are must-read for the beginners in the stock market. They are:

  • The Intelligent Investor
  • One Up on the wall street
  • Beating the street
  • Common Stocks and uncommon profits

You can read further about Indian stock market from the following useful links:

Now after learning the basics, the main tasks begins. You need to learn how to follow the stock market, their trends, their fluctuations etc.

Get good financial knowledge:

A good financial knowledge is a key for the success in the stock market. You need to understand the fundamentals before entering the stock world. The basics of Earnings per share(EPS), P/E Ratio, Book Value, P/BV, Dividend, Return on Equity(ROE), Return on capital employed(ROCE), debt/equity ratio etc should be known to you before you analyze a stock. You can read further about from these links: Investment Basics, Six Different Types of Stock in Indian Market according to Peter Lynch

Make your dummy portfolio:

A portfolio is nothing but your collection of stocks from different or same sectors. A portfolio shows how many shares you are owning from which sector. Generally, a good portfolio maximizes the profit and minimizes the risk. You can learn how to create your portfolio from this link: How to create your Stock Portfolio?

Follow the stock you’re interested in for few days:

The last step before buying a stock from the stock market is to learn how to follow stocks in the stock market. You should know how to track stocks so that you can buy/sell them at the best time. I advise the beginners to at least follow the stocks for 1 month before buying them. You can learn how to follow a stock from this link: Learn how to follow Stock Market and trends- Trade Brains.

Want to learn more? Here is a best selling book on stock market which I will highly recommend to read: Beating the street by Peter Lynch

Now that you know all the basics for the stock market, you can move further on How to buy a stock in Stock Market?

How to buy a stock in Stock Market?

The basics requirements for buying a stock in the stock market are:

  1. Stockbroker: General people can’t go to a stock exchange and buy/sell stocks. Only members of the stock exchange can buy and sell and they are called the brokers. Every broker should be registered on the Securities and exchange board of India(SEBI). There are a number of brokers/ sub-brokers which you can choose for trading. Some online brokers are Sharekhan, Kotak Securities, ICICI Direct, 5paise and India Bulls.
  2. Saving Account: Obviously you need a saving account for trading in the stock market.
  3. Demat A/C: It’s very simple to open a demat account. Now a day, the banks even offer you to open a 3-in-1 account, i.e. all three Saving+ Demat+ Trading account, by filling few forms just once. The 3-in-1 account will save your timing a lot and I recommend you to open a 3-in-1 account if you want to start trading in the stocks. You can open it in banks like ICICI, SBI, Kotak etc.

    You can decide your online broker for opening demat account depending on the different factors like brokerage charges, facilities offered, annual maintenance charges etc. Here is a link which you may find useful: Compare Online Share Brokers In India And Find Best Stock Broker In India.


    Note: If you open a 3-in-1 account you won’t need to find a stockbroker as the trading account is already included in it.

  4. Laptop and Internet connection: Obviously, the soul of modern era which is a must for all the online facilities.

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NOTE:

The documents required to open a 3-in-1 account are PAN card, Aadhar Card (for address proof) and an ID proof (generally Aadhar/Pan card can also be used as ID card). Once you opened your demat account, you will receive your username and password, and then you can start trading using your account

Also Read:

How to trade in ICICI Direct? Buy/Sell Stocks
How to buy a Stock using SBI demat account?

I hope this post about ‘how to buy a stock in Stock Market’ is useful for the readers. Feel free to comment below or message me if you have any doubts or if you need any further help.

New to stocks and confused where to start? Here’s an amazing online course for the newbie investors: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your stock market journey today!

March 27, 2017 Investment Basics, Portfolio 22 comments

Six Different Types of Stock in Indian Market according to Peter Lynch

Six Different Types of Stock in Indian Market according to Peter Lynch:

Peter Lynch is the renowned American investor and ex-manager of Magellan fund at Fidelity investment. He is famous for his averaged 29.2% annual return for the duration of 13 years. The prodigal mutual fund manager divided the stocks into six categories during his investment experience. Namely: slow growers, stalwarts, fast growers, cyclical, asset plays, and turnarounds.

We are also going to follow lynch’s path.  Here are the categories with the examples of stocks from Indian markets so that they are easier to understand.

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Six Different Types of Stock in Indian Market according to Peter Lynch:

1. Slow growers / Sluggards

Slow growers, which originally once were fast growers, can be identified easily with a slow growth rate i.e. a low upward slope of earnings growth and stock price. The growth is usually between 2-5%. They can also be identified by the size and generosity of their dividend.

Peter Lynch did not like to spend time on these ‘sluggards’ and his portfolio consisted of very less percentage of slow growers. According to him, the only reason to buy these stocks is their dividends. They generally give a very good dividend (about 4-6%) and are a good asset during the recession as its very unlikely for their stock to feel too hard.

Example: Reliance, Power Grid Corp

2. The Stalwarts

They are the second type of categories of the Six Different Types of Stock in Indian Market according to Peter Lynch.

These stocks have average growth rate and are usually large companies that have earnings growth in the 10-12 percent range – higher than the slow growers.

According to Peter lynch, you can get a good return from these stocks if you wait for a long time. They generally end up from two-baggers (two times your buying price) to four-baggers. It’s good to have few stalwarts in your portfolio.

Example: HPCL, Bajaj Auto, Mahindra & Mahindra

Best book for Stock Market Beginners– If you are new to stocks, I will highly recommend to read ‘ONE UP ON THE WALL STREET‘ by Peter Lynch. It is available currently at the best price on Amazon.

3. The fast growers

The fast growers are everyone’s first choice. These stocks are generally small aggressive new enterprises and they grow at an impressive rate of 20-25% per year. But one should be open-eyed when they own a fast grower. There is a great likelihood for the fast growers to get hammered if they run out of steam and become a slow grower.

Peter lynch’s portfolio consisted mainly of the fast growers. He looks for fast growers with good balance sheets and which have good profitability. This category is also the lynch’s favorite among the Six Different Types of Stock in Indian Market according to Peter Lynch

Example: MRF, Eicher Motors, axis bank, Infosys, Maruti

4. The Cyclicals

The Cyclical can be distinguished from the fast growers as the cyclical keep on expanding and contracting and again repeating the same cycle (while the fast growers keep on expanding). They tend to flourish when coming out of a recession into a vigorous economy.

Automobiles, Metals, Chemicals, Tyres etc are the examples of the cyclical. Their charts tend to be very up and down over time. It is advised to owning the cyclical only on the right part of the cycle.  That is when they are expanding. Sometimes, it even takes them years before they perform. Timing is everything and you need to be able to detect the early signs that business is falling off or picking up.

Example: GAIL, Coal India, SBI

5. The turnarounds

The turnarounds are identified by Lynch as ‘no growers’ rather than ‘slow growers’. They are potential fatalities that have been badly hammered by the market for one or more of a variety of reasons. But they can make up lost ground very quickly.

Peter lynch identifies different types of turnarounds in his book ‘One up on the Wall Street’ and admits to being burnt by a number of them but suggests that the occasional success can be exciting and rewarding.

Example: Tata Steel, Phoenix Mills etc

6. The Asset Plays

This is the last category from the Six Different Types of Stock in Indian Market according to Peter Lynch.

The asset plays are those stocks whose stocks are greatly undervalued and those stocks that have assets overlooked by the market. These assets may be simply cash that the company is holding but which is not valued when there has been a general market downturn. The cash may be worth more than the market capitalization of the company.

Many of the PSUs are key asset plays because of the real estate property they are holding. For example- State bank of India. SBI has over 24,000 branches all over India. A similar example is ONGC.

Peter lynch understands the worth of the asset plays. He suggests owning few of these stocks in your portfolio as they are most likely to give you a good return in the future. The only significant thing in these stocks is to carefully find these stocks and right estimate for the worth of the assets. If you are able to do it, own that stock.

Try it out yourself!

So, these are the six different types of Stock in Indian Market according to Peter Lynch. If you followed the post, you can also easily categorize any stock in the six types given above. So, go on, play around different stocks and classify them accordingly to above categories.

NOTE: The research on Six Different Types of Stock in Indian Market according to Peter Lynch is derived from his Book ONE UP ON WALL STREET.

Further, please comment below with the name of stocks that fits the above categories. I will really appreciate it and it will be very beneficial for the other post viewers.

New to stocks and confused where to start? Here’s an amazing online course for the newbie investors: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your stock market journey today!

March 7, 2017 Investment Basics, Portfolio 8 comments

How to create your Stock Portfolio?

How to create your stock portfolio? An intelligent investor knows the importance of a smart portfolio. Whether he is investing in stocks, bonds or mutual investment, he always chooses his portfolio smartly. Although most of the people have a different strategy for creating their portfolio, there are few main points that should be taken care when creating your portfolio.

  • Diversification

A smart portfolio is the one, which maximizes the profit and minimizes the risk. The first step of creating an intelligent portfolio is ‘Diversification’.

What diversification means, in general, is to buy stocks from different sectors (Banks, autos, FMCG, energy, IT etc) rather than buying a single or two stocks of huge amount. In short, it can be explained by the old saying- ‘Don’t put all your eggs in the same basket’.

While many people argue that, it makes a lot of sense to invest a huge sum of money on a sure-shot stock (which you are too confident about- example Microsoft, which gave 10 times or more returns). However, we like to differ from the argument.

There are various reasons we can give you to support our conclusion.

First, you never know which stock is next Microsoft. Stocks like Microsoft are only a few among more than 5000 stocks in the stock market. If by any chance you made a mistake or if by bad circumstances, the company is not able to perform as expected, and then your whole sum of money will be in vain & you may be in a tremendous loss. Second, for investing in such a company, you need to be 1000% sure. You need to do a lot of intense investment about the company (which is generally not possible for a retail investor), but if you have a diversified portfolio you can slight risks if you are confident about your other stocks.

For example, if you have 10 good stocks, you can be certain that most of them (8-9) will outperform the market and give you a good result. 1-2 bad stocks in a group of 10 will not affect your overall portfolio. However, in the case of a single stock, it is either win or lose.

If you want to learn more about stock market investing strategies, I will highly recommend you to read this best-selling book: One Up On Wall Street: How To Use What You Already Know To Make Money In the Market by Peter Lynch

Therefore, in this post about How to create your stock portfolio, we suggest our retail investors invest in a diversified portfolio. Do not buy 1 lakh shares of just one company in your portfolio.

The advantages of a diversified portfolio:

  1. Diversification helps you in giving liberty to choose a variety of stock. You need to do extraordinary in all the stocks you choose. If most of the stocks are performing well, then your portfolio will overall be in profit. Like the legendary investor Warren Buffett said ‘You only have to do a very few thing right in your life so long as you don’t do too many things wrong.’
  1. Sometimes some sectors underperform and because of which the stock will underperform. Say, if the bank sector is not performing then your bank stock will be in loss. However, it is very less likely that all other sectors (IT, autos, FMCG etc), will also not perform at the same time. During such times, diversification can help you to remain in profit withholding the stocks of other sectors.
  2. Further, if because of some unpredictable reason, one of your stock is not performing well, but you are confident that it will perform well in future, you can still keep the stock on the stake of your other good-performing stocks. You just need to balance out and be overall in profit. [In undiversified case, if your stock is not performing, you will be in overall loss and which might lead you to sell that potential stock.]

Hence, form the arguments that we just put forward, you must follow the diversified portfolio in the stock investment in order to minimize your losses.

Example of how to create a stock portfolio:

Now, we will give you an example of how to create your stock portfolio using diversified portfolio strategy so that you can get an idea of how to create one.

 

 

Stock Name Sector Price No of Stocks Investment** % in Portfolia
BPCL Oil & Gas 713.12 20 15000 21.28%
IndusInd Bank Bank 1334.22 10 13500 19.15%
Hero Motocorp Auto 3163.05 2 6300 8.94%
Tata Motors Auto 460.20 10 4700 6.67%
Infosys IT 990.45 10 10000 14.18%
Tata Steel Metals 485 20 10000 14.18%
Emami FMCG 1077.55 10 11000 15.60%
Total 70500 100%

 

**Investment is not just Price X (no of stocks). It also includes other charges like brokerage charge, transaction charge, STT, service charge etc.

There are other important points in our discussion about how to create your stock portfolio, which need to be taken care while creating your portfolio, and will be discussed in subsequent posts.

New to stocks and confused where to start? Here’s an amazing online course for the newbie investors: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your stock market journey today!

March 1, 2017 Investment Basics, Portfolio 22 comments

What is Bull and Bear market? Stock Market Basics

What is Bull and Bear market?

Bull Market:

A bull market is a market financial situation which is characterized by the investor’s confidence, optimism and positive expectations that good results will continue.

The bull market is generally related to the stock market but it applies to all financial markets like currencies, bonds, commodities etc. During a bull market, everything in the economy is amazing like growing GDP, increased job, rising stock prices etc.

Bull markets often lead to the overvaluation of the stocks as the investors are highly optimistic and believe that the stock will always go up.

Bear Market:

The opposite of a bull market is a bear market, which is typically characterized by a bad economy, fewer jobs, recession, and falling share prices. The investor’s behavior during a bearish market is highly pessimistic as they fear that the stocks will go down and down.

Bear markets make it tough for investors to pick profitable stocks for the short term.

NOTE: The ‘bull’ and ‘bear’ words that are used in the market is derived from the way these animals attack their opponents. A bull thrusts its horns up into the air upwards, while a bear swipes its paws downward. These actions are metaphors for the movement of a market. If the trend is upwards, it’s a bull market. And, if the trend is downwards, it’s a bear market.

If you want to read further in details, I will highly recommend to read the book- Bulls, Bears and Other Beasts: A Story of the Indian Stock Market by Santosh Nair, one of the best book on Indian Stock Market.


Bull and Bear market example for India:

India’s Bombay Stock Exchange Index, was in a bull market trend for about five years from April 2003 to January 2008 as it increased from 2,900 points to 21,000 points.

Examples of Bear Market in India are – the stock market crashes of 1992 and 1994 and the dotcom crash of 2000.

Further, the Great Depression of the 1930s is a famous example of a bear market in the US.

Like all other markets bull market or the bear market does not last endlessly as no market can last forever. Further, It is difficult to predict the changing trends in the market as it is much influenced by the psychological effects and speculations of investors.

New to stocks and confused where to start? Here’s an amazing online course for the newbie investors: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your stock market journey today!

January 11, 2017 Investment Basics 9 comments

Demonetization effect on Banking, FMCG and Real Estate sectors 2016-17.

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The demonetization of 500 and 1000 rupee notes have dipped market very badly as lots of investors started withdrawing money out of the market. Some sectors like real estate where most of the black money is involved has effected very poorly.

Here is the sector wise analysis of the stock-market due to the effect of demonetization.

Banking and Finance:

At first when the demonetization news was announced, investors thought that from then onwards each and every transaction in the market will happen through banks (which is true) so for the first 4 days the almost all the major banking companies SBI (10%), BOB (11.21%), ICICI (3.4%), PNB (13%), BOI (14.4%), Union Bank of India (11.4%) soared. After that cash was being accumulated into banks and there is no outflow of cash from the banks so investors thought companies has to pay the minimum 4% interest to the depositors and hence companies income through loans are low compared to depositors; so investors started losing confidence in banks from then onwards till Jan 1st almost all biggies SBI (13%), BOB (7.3%), ICICI (13%) , PNB (27.7%), BOI (14.2%) and Union bank of India (15.5%) share prices fell down.

Later Narendra Modi announced benefits on home loans of up to 9 lakhs; the poorest and the most underprivileged will get a 4% interest benefit. For home loans of up to 12 lakhs, they will get a 3% interest benefit and all the biggies announced lending rate cuts ranging from 40 to 90 basis points with this various companies will take loan from banks for development purpose, no of people buying homes will increase so in the upcoming few quarters banking sector has huge potential to grow up to 9.5%.

FMCG:

Due to demonetization customers dint have money to purchase daily consumable goods, so market value of FMCG went down due to less sales but after Dec 30 cash started flowing in the market so people started purchasing goods from the shops due to this market value of FMCG started increasing, Even though the share prices of these companies went down they will recover and bullish within 2 to 3 months.

Real estate:

We can see the real estate sector in two forms 1. Luxury homes sector and 2.Residential homes

  1. Luxury homes: – The luxury and high-end segments of residential real estate have seen a major impact, since the legal banking/financing channels have accounted for only a small part of all transactions in this space, which has seen many payments done in cash, which resulted in luxury properties dipping by 25%-30%. Prices of so many companies Delta crop (50%), DLF (27%), HDIL (27%) fell down drastically.
  1. Residential homes: – In this sector almost all the transactions happen through banking/ financial channels so even if the share prices of these companies fell down due to demonetization news such company share prices will correct within a few months. Some of the companies that is happening like this are KNR construction, Hindustan construction.
January 10, 2017 Market No comments yet

What are stocks? And what is a Stock Market?

What are stocks?

What is a stock market?

What is Bombay stock exchange (BSE)?

What is National stock exchange (NSE)?

What is Sensex?

What is Nifty?

What is meant be Sensex/Nifty is up or down?

How does upward or downward movement of Sensex/Nifty affect the growth of the country?

What is bull and bear market?

 These are the major questions that are repeatedly asked by the common people of India whenever they hear the financial news of the television or the newspapers or magazines. Although a simple definition of all the above terms can be found easily in a book or internet, it would be simpler and more interesting if we explain the whole scenario in the story form. Later, we will give the standard definition for all the above terms for your better understanding.

It all starts with a company. Let’s say there is a company X. It is a manufacturing company and is doing well in its sector. Now it wants to expand by doing some project or research and development(R&D) in his field. For this company requires capital (money).

 

At first, the company will try to get the capital from all the owners to expand the company. Further, when the owners aren’t able to meet the capital needs, it will go the biggest money source, the banks. But this will only increase his debts along with the interests. So, what options the company X has now? Where can the company X get such a large capital from?

 

The answer is public. The company can collect a large sum of money by giving a little ownership of the company to the public.

 

And here begins the journey of the company in the stock market. A stock market (ex BSE, NSE) is a place where the company will be able to present his ownership (in the form of the stocks) to the public. And why will the people buy the stocks of the company X? It totally depends on how positive the people is about the growth of the company in terms of sales, earnings, revenue etc. If the people think that the company will be able to grow to new heights, or if the people believe in the visions of the company X, then, they will buy the stocks to trade their money with the ownership of the company.

 

Thus by giving the portion of the ownership, the company is able to pool a great amount of money for its growth and development.

 

Generally, the company does not offer its complete shares to the public. Almost all of the times the owners (promoters) keep a portion of the stock with them to keep the ownership in their hands.

 

For example, let’s say the company X decided to provide 10,00,000 shares. Out of the total, it decides to offer 7,00,000 shares to the public and remaining 3,00,000 shares with them. Here, the promoters share will be 30%.

 

 (Here, we would also like to define the term free-float market capitalization here. It is the product of the total shares offered to the public and the price of per equity share. Let’s say the company X each share price costs Rs 50 and it offers 7,00,000 public shares. Then, the free float market capitalization here will be equal to 50*7,00,000. The total market capitalization (not-free float) will be 50*10,00,000).

 

Now that the company X has decided to enter the stock market. When, the first time the company enters the market, it has to provide an offering price for the shares. This is called initial public offering i.e. IPO (we will discuss IPO in details in later sections). The IPO is offered in the primary market, where the seller is the company and the buyer is the public.

 

After the IPO, the stock goes to the secondary market, where the buyer and sellers both are the public. Here, the public generally exchanges the ownership of the company.

That’s the story of the stock and the company X. In the next section, we will discuss the two stock markets in India i.e. Bombay stock exchange (BSE) and National stock exchange (NSE) and their indexes (Sensex/Nifty).

If you want to learn Indian Stock market from scratch, I will highly recommend you to read this book: Bulls, Bears and Other Beasts: A Story of the Indian Stock Market by Santosh Nair

What are stocks? What is the stock market? -Summary

Stock:  A stock is a general term used to describe the ownership of any company. Stock represents a claim on the company’s assets and earnings. As you acquire more stock, your ownership stake in the company becomes greater. Shares, equity, or stock, all basically mean the same thing.

Stock Market: The stock market is the market in which shares of publicly held companies are issued and traded either through exchanges or over-the-counter markets. It is a place where shares of publicly listed companies are traded.

The stock market can be split into two main sections: the primary market and the secondary market.

  1. Primary Market: It’s where new issues are first sold through initial public offerings. Retail Investors, mutual funds, domestical, and foreign institutional investors buy the share from the promoters. Institutional investors typically purchase most of these shares during this first-time issue by the company.
  2. Secondary Market: All subsequent trading goes on in the secondary market where participants include both institutional and individual investors.

Initial Public Offering (IPO): An IPO is the first time that the stock of a private company is offered to the public. It is a source of collecting money from the public for the first time in the market to fund its projects. In return, the company gives the share to the investors in the company. IPOs are often issued by smaller, younger companies seeking capital to expand, but they can also be done by large privately-owned companies looking to become publicly traded.

Market Capitalization: Market Cap or Market capitalization refers to the total market value of a company’s outstanding shares. It is calculated by multiplying a company’s shares outstanding by the current market price of one share. The investment community uses this figure to determine a company’s size, as opposed to using sales or total asset figures.

January 9, 2017 Investment Basics 29 comments