EQUITY

Stock Market Fundamentals

What are the basics of financial instruments?
Let us understand the two fundamental types of investments, namely bonds and stocks with an example. Eg. Imagine you want to start your own grocery store. You will need a capital amount to get started. You acquire the requisite funds from a friend and write down a receipt of this loan ' I owe you Rs 1, 00,000 and will repay you the principal loan amount plus 5% interest'. Your friend has just bought a bond (IOU) by lending money to your company.

Thus a bond is a means of investing money by lending money to others. When you invest in bonds, the bond you buy will show the amount of money being borrowed (face value), the interest rate (coupon rate or yield) that the borrower has to pay, the interest payments (coupon payments), and the deadline for paying the money back (maturity dates).

There are several Pro's and Con's to investing in bonds
Pro's
Ø Bonds give higher interest rates compared to short-term investments.
Ø Bonds are less risky when compared to stocks.

Con's
Ø Selling bonds before they're due, may result in a loss, known as a discount.
Ø If the issuer of the bond declares bankruptcy, you may lose your money. Hence you must critically evaluate the credibility of the issuer of the bond, ensuring that he has the capability to repay the bond amount.

Now, let us continue with the same example. To accrue more capital for your new grocery store, you sell half your company to your brother for Rs 50,000. You put this transaction in writing 'my new company will issue 100 shares of stock. My brother will buy 50 shares for Rs 50,000.' Thus, your brother has just bought 50% of the shares of stock of your company.

Thus, to explain stocks:
Stocks, also known as Equities, are shares in a company. It is the certificate of ownership of a corporation. In simple terms, when you invest in a company's stock or buy its shares, you own part of a company. Thus, as a stockholder, you share a portion of the profit the company may make, as well as a portion of the loss a company may take. As the company keeps doing better, your stocks will increase in value and yield higher dividends.
Dividend: A sum of money, determined by a company's directors, paid to shareholders of a corporation out of its earnings.

How to Identify the Best Stocks to Invest In

Everyone, who are investing in stocks; are crazy about how to indentify the best stocks to invest in? They are trying every trick to ensure greater profit and reduce the loss. But even then there are people who are getting bankrupt and there are some who are making fortunes at the stock exchange. Why is that? There is no magic in this and stock investment is not about luck. To identify the best stocks to invest, you need to have information and you also need to know how to analyze that information and of course how to use them. Only then you can make profitable investments at the stock market. Here we have discussed a few factors that are instrumental in judging the potential of the company and its stock.

Sales Revenue - Sales revenue is a crucial parameter to judge the financial health of a company. Sales revenue is the amount of money that a company makes in a financial year. Sales revenue also includes some portion of the cost and loss as well.

Earnings - Earnings of the company or the net income of the company shows if the business is making profit or loss. It shows the present financial condition of the company as well as helps to predict the future of the company as well. If a company is posting profit year after year, it is quite obvious that the company has a good future ahead.

Debt - Debt is the financial liability to any company. If a company is running with debt, then major share of its earnings will go to pay up the debts and obviously, the net profit will decrease. So it is always better to invest in stocks that have lower debt level.

Liquidity - Liquidity of a company reveals the cash holding position of the company. It is quite natural that a company with better liquidity is more likely to expand its business and grow in the near future. So it is important to look at the liquidity of the company as well.

Valuation: Valuation is the worth of the company. Most widely used and easiest way to find out about the valuation is the P/E Ratio. According to the experts, it is always better to invest in stocks that have a P/E ratio between 5 and 50.

These are just some of the points that you need to consider for choosing the best stocks to invest in. There are so many other factors that also need to be considered for better stock picks, such as the overall market trend, direction of the market, the prevailing trend in the sector in which you are likely to invest and so on.

Looking at Online Stock Trading

While trading online stocks you always must consider the risks involved with trading stocks. If your a beginner you will need to get a feel for using the internet and trading your stocks. You need to learn to walk before you can run, the simplest way I learned to trade stocks was to read about it and do some simulated stock games found around the internet.

Never use money you are not willing to risk, when you finally feel comfortable with online trading you will have to keep this in mind. You must realize the value of waiting it out, if a stock is going down should you pull yourself out of it? Not necessarily, sometimes you will need to wait out the storm to reach a calm safe zone. Play around with stocks a bit, learn if it's for you or not. If you are the type of person who cannot risk money to make money, maybe you might have better luck investing your money somewhere that is safer.

There is much money to be made online trading stocks, millionaires and billionaires have been made and struck down in a single breath from the stock market. Even when you feel everything is going well it could all of a sudden backfire and you could be left out in the cold. I personally invest in many different stocks, I am the kind of person who doesn't put all the eggs in one basket. I have learned from experience that doing this will leave a cold feeling in your heart towards trading stocks. So I went out and learned, sure I lost a few dollars here and there but I have been coming out of it for sometime now. I waited out the storms and stood my ground. I now make a pretty penny with online trading, but I had to find a comfortable spot to trade in.

If your new, like I once was your going to find many ups and downs. This is your learning period. Take in as much as you can while your in this learning mode. Don't go crazy and think your going to make millions if you only invest in this "one stock" forget the hype and play it safe until you find a comfortable place to hang your hat.

What Stock Should I Buy

Often, one of the first questions an investor asks is "What stock should I buy?" This question can involve a great deal of time and analysis. In many cases, the average investor will want to find out what the company does; review its financial statements; see if it pays a dividend, as well as how long that dividend has been paid and whether or not it will continue to be paid; discover whether the company's earnings are rising or falling; analyze its products; and so on. In other words, the investor does a great deal of fundamental research to find out if that stock is the one to purchase.

This analysis answers the question of what to buy. However, it says nothing of when to buy. The best stocks have periods when they perform worse than the market, just as the weakest stocks have times when they perform better than the market. If no one is going to buy the so-called best stocks, then they are not going to rise. On the other hand, if a large number of investors buy a fundamentally weak stock, then it is headed higher.

At DWA we use point and figure charts to determine when to buy stocks. By charting stocks with this method, we see the movement that determines whether supply or demand is in control of the stock. If it is supply, then the probability is high for that stock to decline. The odds favor a rise in the price if demand is winning the battle. You will also want to keep in mind that there are no dis-interested investors. Back in the 1920s, there was no Securities and Exchange Commission to regulate companies and when and what they reported. Rumors were rampant, and it was not surprising to see wealthy and knowledgeable investors pool their money to trade. These pools gave them a huge advantage over the individual investors.

Today the Internet creates stock movement. There are chat rooms everywhere and practically anyone can offer ideas. Remember that the person who is wildly promoting or recommending a particular stock more than likely already owns it. You will also want to keep in mind that the investor who is badmouthing a stock has probably just sold that stock or has sold it short, hoping to buy it back at a lower price.

In this environment, you need something that will help you sort through the morass of opinions out there to determine whether demand or supply is in control. We recommend using technical analysis, preferably the point and figure methodology. Let the fundamental analyst help determine what you buy. But let the technical analyst determine when you buy that particular stock. When the market is topping, typically the news stories are all good, and that is not when you want to buy.

Investing in the Stock Markets

You have recently decided to start investing in the stock market, but you don't have any idea how it works, so you're doing a lot of research, but do you know what kind of investor you are?

There are a broad range of stocks available to invest in, and ideally, you want to pick the stocks that best match your investing style. What is your investing style you may ask yourself? Well, if are you interested in short-term growth with higher risks, than you may want to look at penny stocks. If you would rather not take as much of a risk, but allow your investment to grow over time, you may want to consider some type of income stock, which sometimes can even pay a dividend on the shares that you own. A dividend is a profit sharing incentive offered by some companies on the shares of their stock to help make up for the slower growth those stocks experience.

If you wish, you can invest in technology stocks, such as Google, or Yahoo, hoping to be a part of the next dot-com rush by maybe finding a company that will experience some explosive growth, or you can invest in health care stocks like Johnson and Johnson. Technology and health care stocks are known as sector stocks, one of the many available investment options that are available to you as an investor. Other types of sector stocks may include Public Utilities, Mining stocks, or even Pharmaceutical stocks.

You can find stocks that are cyclical in nature, their price is affected by what is happening in that industry, and if that industry is doing well as a whole, then those stocks will perform better and experience more growth, whereas if that industry is performing poorly, the stocks will reflect that and now show as much growth. The automobile industry is a good example of a cyclical investment, as consumers have more money to spend due to a good economy, they may decide to purchase a new vehicle, but when times are tough, they may choose to just repair the old vehicle.

There is also another classification of stock, which goes beyond growth, income, cyclical, or sector. Here we are talking about Preferred stock and Common stock. Some of the differences between the two are that in most cases, if a dividend is offered on the stock, a preferred stock dividend is pretty constant in the amount that is paid to the investor, meaning that the payout will not rise and fall as much as the dividends that are paid out on a share of common stock, which may fluctuate higher or lower.
If the company declares bankruptcy, and the assets are liquidated, those that hold preferred stock will be paid back before those that hold common stock, but in some cases, all the investors could loose their money.

Picking a stock can take some time as you see, and it requires a lot of research, but one of the first steps you want to look at is what do you want to achieve, and armed with that knowledge, you will soon find an investment option in stocks that best suits your needs.

The Art of Making Money in Stock Market

Most people know that the stock market is unpredictable. Losses in stock market investment are an inevitable part of the trading process. Therefore every stock market trader, howsoever shrewd and experienced he may be, is bound to incur a loss at one time or another.

So before you start trading in the stock market, you must be prepared to suffer losses like every other trader. This, however, does not mean that making money in stock market is more a matter of luck or chance.

This only means that you should make a thorough search, both fundamental and analytical, about the profitability of the stock before investing in it. Having done that you must be prepared to suffer loss since, as already said, the stock market always remains unpredictable.

You have to develop a mind set which should be prepared to take losses in your stride.

What is the use of developing this kind of mind set?

If you understand that losses are part of the stock trading, you will look at your losses with detachment and equanimity like a good sportsman. You will not be shocked and perturbed. You will not lose your perspective and you will be able to prepare yourself for the next game, next trade with a cool mind.

A disturbed mind cannot react properly. It is likely to misinterpret the graphs and charts of the market trends and draw wrong conclusions.

A constantly nagging fear of suffering another loss in the next trade may prevent a trader from investing which would mean that the loss incurred in the previous trade would not be recouped.

If you have a positive mind set and understand that you have to make money in an inherently mercurial market, you try to be realistic instead of perfectionist in stock trading.

A good trading day for a realistic and positive trader will not be one when he makes money. It would be the one when he has made both an extensive and intensive research in the stock he wants to trade in. He has made a thorough planning with discipline and focus and follows each step as per his planned strategy. Making money in stock market for such investors will become easy.

Experts in trading psychology believe that it is important to concentrate upon things which you can easily control. You should not try to lose your focus on attending things which you cannot control.

For example, while you cannot control the price trend, you can control your losses by using the stop loss tool effectively. You can understand the concept of support and resistance levels and use them successfully in your trading.

According to Tim Renolds, you should develop three basic strategies to stop your losses. These are price based, time based and indicator based strategies.

In order to use the price based stop loss strategy, you will have "to make a hypothesis about the trade and identify a low point in that particular stock market." Having done that, you should "set your trade entries near your points, thus making sure that losses will not be overly excessive if the hypothesis fails."

The time based stops involves making optimum use of your time. You should fix up a certain holding period to achieve your target in trading a particular stock. If you cannot achieve your target within that time frame, you should not keep that stock and sell it off.

The indicator based strategy involves understanding market indicators. As an intelligent trader you should become aware of the market indicators and utilize your experience to analyze them to your benefit. The market indicators include volume, advances, declines, new highs and lows and so on.

Experts in stock trading psychology recommend that you should set stops and "rehearse them mentally". It will help to ensure that you follow these strategies thoroughly and benefit from them.

Another important point is that you should immune yourself from the influence of mass psychology. It means that you should resist the temptation to do what the majority of stock traders are doing. You must make up your own mind whether or not you have to buy or sell a stock. You can make up your own mind only when you have done your own independent research and do not listen to the secrets and tips offered by your friends and stock market experts.