Stock Market Investments

Thursday, December 20, 2007 | Labels: | 0 comments |

A stock market is a private or public market for the trading of company stock and derivatives of company stock at an agreed price; both of these are securities listed on a stock exchange as well as those only traded privately. Trading in stock markets is one of the most popular investment methods.

A “stock” is a share in the ownership of a company. A stock represents a claim on the company's assets and earnings. As you acquire more stocks, your ownership stake in the company becomes greater.

Note: Some times different words like shares, equity, stocks etc. are used. All these words mean the same thing.

Here's a basic guide about stock trading. If you are considering investing in the stock market, you MUST read it.

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Stock Trading Guide> Part I: Introduction

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A “stock” is a share in the ownership of a company. Its a type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings.

So what does ownership of a company give you?

Holding a company's stock means that you are one of the many owners (shareholders) of a company and, as such, you have a claim to everything the company owns.

This means that technically you own a tiny little piece of all the furniture, every trademark, and every contract of the company. As an owner, you are entitled to your share of the company's earnings as well.

These earnings will be given to you. These earnings are called “dividends” and are given to the shareholders from time to time.

A stock is represented by a "stock certificate". This is a piece of paper that is proof of your ownership. However, now-a-days you could also have a “demat” account. This means that there will be no “stock certificates”. Everything will be done though the computer electronically. Selling and buying stocks can be done just by a few clicks.

Being a shareholder of a public company does not mean you have a say in the day-to-day running of the business. Instead, “one vote per share” to elect the board of directors of the company at annual meetings is all you can do. For instance, being a Microsoft shareholder doesn't mean you can call up Bill Gates and tell him how you think the company should be run.

The management of the company is supposed to increase the value of the firm for shareholders. If this doesn't happen, the shareholders can vote to have the management removed. In reality, individual investors like you and I don't own enough shares to have a material influence on the company. It's really the big boys like large institutional investors and billionaire entrepreneurs who make the decisions.

For ordinary shareholders, not being able to manage the company isn't such a big deal. After all, the idea is that you don't want to have to work to make money, right? The importance of being a shareholder is that you are entitled to a portion of the company’s profits and have a claim on assets.

Profits are sometimes paid out in the form of dividends as mentioned earlier. The more shares you own, the larger the portion of the profits you get. Your claim on assets is only relevant if a company goes bankrupt. In case of liquidation, you'll receive what's left after all the creditors have been paid.

Another extremely important feature of stock is "limited liability", which means that, as an owner of a stock, you are "not personally liable" if the company is not able to pay its debts.

In other legal structures such as partnerships, if the partnership firm goes bankrupt the creditors can come after the partners “personally” and sell off their house, car, furniture, etc.
Owning stock means that, no matter what happens to the company, the maximum value you can lose is the value of your stocks. Even if a company of which you are a shareholder goes bankrupt, you can never lose your personal assets.
Why would the founders share the profits with thousands of people when they could keep profits to themselves? This is the obvious question that comes up next. This what the next section is all about!

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Stock Trading Guide> Part II: Need for Stocks

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Why would the founders share the profits with thousands of people when they could keep profits to themselves? The reason is that at some point every company needs to "raise money". To do this, companies can either borrow it from somebody or raise it by selling part of the company, which is known as issuing stock.

A company can borrow by taking a loan from a bank or by issuing bonds. Both methods come under "debt financing". On the other hand, issuing stock is called “equity financing”. Issuing stock is advantageous for the company because it does not require the company to pay back the money or make interest payments along the way.

All that the shareholders get in return for their money is the hope that the shares will someday be worth more than what they paid for them. The first sale of a stock, which is issued by the private company itself, is called the initial public offering (IPO).

It is important that you understand the distinction between a company financing through debt and financing through equity. When you buy a debt investment such as a bond, you are guaranteed the return of your money (the principal) along with promised interest payments.

This isn't the case with an equity investment. By becoming an owner, you assume the risk of the company not being successful - just as a small business owner isn't guaranteed a return, neither is a shareholder. Shareholders earn a lot if a company is successful, but they also stand to lose their entire investment if the company isn't successful.

It’s a tricky game!

Note that: There are no guarantees when it comes to individual stocks. Some companies pay out dividends, but many others do not. And there is no obligation to pay out dividends. Without dividends, an investor can make money on a stock only through its appreciation of the stock price in the open market.

On the downside, any stock may go bankrupt, in which case your investment is worth nothing.

Having understood this, we now want to know what makes stock prices rise and fall? If we know this, we will know which stocks to buy. In the next section we will try to understand what makes stock prices go up and down.

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Stock Trading Guide> Part III: Understanding the Markets

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A stock market is a private or public market for the trading of company stock and derivatives of company stock at an agreed price; both of these are securities listed on a stock exchange as well as those only traded privately.

Stock market index

The movements of the prices in a market or section of a market are captured in price indices called stock market indices, of which there are many, e.g., the S&P, the FTSE and the Euronext indices. Such indices are usually market capitalization (the total market value of floating capital of the company) weighted, with the weights reflecting the contribution of the stock to the index.

If the index goes up, it means that the prices of the stocks of most of the major companies on the BSE have gone up. If the index goes down, this tells you that the stock price of most of the major stocks on the stock exchange have gone down.

What makes stock prices go "up" and "down"?

Stock prices change every day because of market forces. By this we mean that stock prices change because of “supply and demand”. If more people want to buy a stock (demand) than sell it (supply), then the price moves up!

Conversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would fall. (Basics of economics!)

Understanding supply and demand is easy. What is difficult to understand is what makes people like a particular stock and dislike another stock. If you understand this, you will know what people are buying and what people are selling. If you know this you will know what prices go up and what prices go down!

To figure out the likes and dislikes of people, you have to figure out what news is positive for a company and what news is negative and how any news about a company will be interpreted by the people.

The most important factor that affects the value of a company is its earnings. Earnings are the profit a company makes, and in the long run no company can survive without them. It makes sense when you think about it. If a company never makes money, it isn't going to stay in business. Public companies are required to report their earnings four times a year (once each quarter).

Dalal Street watches with great attention at these times, which are referred to as earnings seasons. The reason behind this is that analysts base their future value of a company on their earnings projection.
If a company's results are better than expected, the price jumps up. If a company's results disappoint and are worse than expected, then the price will fall.

Of course, it's not just earnings that can change the feeling people have about a stock. It would be a rather simple world if this were the case! During the “dotcom bubble”, for example, the stock price of dozens of internet companies rose without ever making even the smallest profit. As we all know, these high stock prices did not hold, and most internet companies saw their values shrink to a fraction of their highs. Still, this fact demonstrates that there are factors other than current earnings that influence stocks.

So, what are "all the factors" that affect the stocks price? The best answer is that nobody really knows for sure. Some believe that it isn't possible to predict how stock prices will change, while others think that by drawing charts and looking at past price movements, you can determine when to buy and sell. The only thing we do know is that stocks are volatile and can change in price very very rapidly.

Just remember this: At the most fundamental level, supply and demand in the market determines stock price.

There are many types of techniques and methods that investors use to figure out whether a stock price will go up or down! We will try to give you an introduction to these techniques in Next article.

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Stock Trading Guide> Part IV: Important Investment Basics

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You need to KNOW some “unforgettable basics” before you enter the world of investing in stocks. The stock market is a field dominated by savvy investors who know the ins-and-outs of the market. For people who are not “on the inside”, the stock market can be a VERY dangerous place. :

Don't even consider "tips" that tell you about "hot stocks". Consider the source:
There are many people in the market who put in all their time and effort in promoting certain stocks. They do this because they have their money invested in those stocks. If they can get enough people to buy the stock and they can get the stock price to rise, they will sell the stock for a huge price, the stock price will crash and they will walk off to promote another stock.

Always use your own brain:
It's extremely important. You must always use your own brain. Relying on the advice of others, no matter how well intentioned it may be, is almost always a complete disaster. Make sure you dig in and really examine the "facts about the companies" before you invest. Ignore press releases which have very little substance, and rely on "hype" to tell the company's story.

And finally the most important tip!!!
Only invest money you can afford to lose:
Sure this is a basic point, but many many people miss it. You should only invest money that you can honestly afford to lose!! Everyone enters into investments with the idea of earning big profits, but in many cases, this never works. (Especially if you are new to investing in the stock market!)

Please understand that the above tips are tips for beginners. Once you really get into the stock market you do not need to follow these rules anymore. But if you are a new investor, you MUST follow these rules. They are for your own safety.

But then again, nothing comes free. Everything has a price. You will have to loose some money, make some bad decisions and then only will you really understand the market. You cannot understand the market by just looking at it from far. By following these rules, you will basically not loose too much!

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Stock Trading Guide> Part V: Stock Trading Strategies

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Having understood all the basics of the stock market and the risk involved, now we will go into stock picking and how to pick the right stock. Before picking the right stock you need to do some analysis.

There are two major types of analysis:
1. Fundamental Analysis
2. Technical Analysis

Fundamental analysis is the analysis of a stock on the basis of core financial and economic analysis to predict the movement of stocks price.

On the other hand, technical analysis is the study of prices and volume, for forecasting of future stock price or financial price movements.

Simply put, fundamental analysis looks at the actual company and tries to figure out what the company price is going to be like in the future. On the other hand technical analysis look at the stocks chart, peoples buying behavior etc. to try and figure out what the stock price is going to be like in the future.

For learning more about these techniques, read the wikipedia entries for fundamental analysis and technical analysis.

« Part IV: Important Investment Basics
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Mutual Funds

Friday, December 14, 2007 | Labels: | 0 comments |

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

Mutual Fund Companies offer various schemes. Investors can choose any particular Fund/Scheme or mix of Funds/Schemes depending upon their perception towards risk. Investment is done on the basis of prevailing Net Asset Values of various schemes.

Mutual Funds Investments are subject to Market Risks.

Types of Funds Sold

  • Debt : Liquid schemes, Income schemes, G-sec schemes, Monthly Income Schemes etc.

  • Equity : Diversified Equity Schemes, Sector Schemes, Index Schemes etc.

  • Hybrid Funds : Balanced Schemes, Special Schemes - Pension Schemes, Child education Schemes etc.

Advantages of Investing in Mutual Funds

  • Professional Money Management & Research
    Mutual funds are managed by professional fund managers who regularly monitor market trends and economic trends for taking investment decisions. They also have dedicated research professionals working with them who make an in depth study of the investment option to take an informed decision.

  • Risk Diversification
    Diversification reduces risk contained in a portfolio by spreading it. It is about not putting all your eggs in one basket. As mutual funds have huge corpuses to invest in, one can be part of a large and well-diversified portfolio with very little investment.

  • Convenience
    With features like dematerialized account statements, easy subscription and redemption processes, availability of NAVs and performance details through journals, newspapers and updates and lot more; Mutual Funds are sure a convenient way of investing.

  • Liquidity
    One of the greatest advantages of Mutual Fund investment is liquidity. Open-ended funds

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Forex Trading

Wednesday, December 12, 2007 | Labels: | 0 comments |

Forex is trading where the commodity is not stocks or shares, but currency. The forex (foreign exchange market) is an international exchange market,where money is sold and bought freely. It is open 24h/24h, 5 days per week. Operating virtually around the clock, the Forex market trades enormous amounts of money.

In the past, foreign exchange trading was limited to large banks and institutional traders, but recent advancements in technology have allowed small traders to take advantage of the many benefits of forex trading using online trading platforms to trade.

For the last few years, forex trading has been a good opportunity for many people to earn really big money. It is the largest and least regulated market providing the greatest liquidity to investors. Daily volume in the currency markets is around $1.5 trillion. Today, to work in a forex market you only need a computer, a small initial capital, and some time to watch the forex chart and see currency exchange rate changes.

Factors affecting currency trading

Although exchange rates are affected by many factors, in the end, currency prices are a result of supply and demand forces. Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology.

Economic factors

These include economic policy, disseminated by government agencies and central banks, economic conditions, generally revealed through economic reports, and other economic indicators.

Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates).

Economic conditions include:

Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.

Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency.

Inflation levels and trends: Typically, a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand, for that particular currency.

Economic growth and health: Reports such as gross domestic product (GDP), employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.

Political conditions

Internal, regional, and international political conditions and events can have a profound effect on currency markets.

For instance, political upheaval and instability can have a negative impact on a nation's economy. The rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Also, events in one country in a region may spur positive or negative interest in a neighboring country and, in the process, affect its currency.

Market psychology

Market psychology and trader perceptions influence the foreign exchange market in a variety of ways:

Flights to quality: Unsettling international events can lead to a "flight to quality," with investors seeking a "safe haven". There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts.

Long-term trends: Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends.

"Buy the rumor, sell the fact:" This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a market being "oversold" or "overbought". To buy the rumor or sell the fact can also be an example of the cognitive bias known as anchoring, when investors focus too much on the relevance of outside events to currency prices.

Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect: the number itself becomes important to market psychology and may have an immediate impact on short-term market moves. "What to watch" can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.

Technical trading considerations: As in other markets, the accumulated price movements in a currency pair such as EUR/USD can form apparent patterns that traders may attempt to use. Many traders study price charts in order to identify such patterns. [...] Read more!

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Invest in Gold

Monday, December 10, 2007 | Labels: | 0 comments |

"The great strength of gold throughout history has not been that you make money by holding it, but rather you do not lose. That ought to remain its best credential". A research study on gold established a remarkable consistency in the purchasing power of gold over four centuries. Its purchasing power in the mid-twentieth century was found to be nearly the same as in the middle of the seventeenth century.

You can safely invest in gold. But take care to keep your jewelery in bank lockers. You can also raise loans on gold for your other portfolio investments. Several options have emerged for investors to invest in gold bars, gold coins, gold funds, gold mining companies and gold mutual funds.

Factors influencing the gold price

Today, like all investments and commodities, the price of gold is ultimately driven by supply and demand, including hoarding and dis-hoarding. Unlike most other commodities, the hoarding and dis-hoarding plays a much bigger role in affecting the price, because almost all the gold ever mined still exists and is potentially able to come on to the market at the right price. Given the huge quantity of above-ground hoarded gold, compared to the annual production, the price of gold is mainly affected by changes in sentiment, rather than changes in annual production. Central banks and the International Monetary Fund play an important role in the gold price.
  • Bank failures
    When dollars were fully convertible into gold, both were regarded as money. However, most people preferred to carry around paper banknotes rather than the somewhat heavier and less divisible gold coins. If people feared their bank would fail, a bank run might have been the result. This is what happened in the USA during the Great Depression of the 1930s, leading President Roosevelt to impose a national emergency and to outlaw the holding of gold by US citizens.

  • Inflation
    Paper currencies pose a risk of being inflated, possibly to the point of hyperinflation. Historically, currencies have lost their value in this way over time. In times of inflation, people seek to protect their savings by purchasing liquid, tangible assets that are valued for some other purpose. Gold is in this respect a good candidate, since producing more is far more difficult than issuing new fiat currency, and its value does not rely on any particular government's health.

  • Low or negative real interest rates
    Gold has a long history of being an inflation proof investment. During times of low or negative real interest rates, when significant inflation is present and interest rates are relatively low, investors seek the safe haven of gold to protect their capital. A prime example of this is the period of Stagflation that occurred during the 1970s and which led to an economic bubble forming in precious metals.

  • War, invasion, looting, crisis
    In times of national crisis, people fear that their assets may be seized and that the currency may become worthless. They see gold as a solid asset which will always buy food or transportation. Thus in times of great uncertainty, particularly when war is feared, the demand for gold rises.

  • Production
    According to the World Gold Council, annual mine production of gold over the last few years has been close to 2,500 tonnes. However, the effects of official gold sales (500 tonnes), scrap sales (850 tonnes), and producer hedging activities take the annual gold supply to around 3,500 tonnes.

  • Demand
    About 3,000 tonnes goes into jewelry or industrial/dental production, and around 500 tonnes goes to retail investors and exchange traded gold funds.

  • Supply and demand
    Some investors consider that supply and demand factors are less relevant than with other commodities since most of the gold ever mined is still above ground and therefore potentially available for sale. However, supply and demand do play a role. According to the World Gold Council, gold demand rose 29% in the first half of 2005. The increase came mainly from the launch of a gold exchange-traded fund, but also from jewelry. Gold demand was at an all time record. Demand from the electronics industry is rising by 11% a year, jewelry by 19%, and industrial and dental by 21%.

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