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Stock market

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Stock market

  1. 1. Some portion of the company sold to public is called stock. If a company has200,000 stocks outstanding means the company has been divided into 200,000units and different people own some units. These units are called stocks.When you purchase stocks, or equities, you become a partial owner of thebusiness. This entitles you to vote at the shareholders meeting and allows youto receive any profits that the company allocates to its owners. These profitsare referred as dividends.Stocks give highest return by its appreciation value and dividends. Off course itinvolves highest risk. Many companies dont pay dividends and there is noobligation for the companies to pay dividends. Hence only way to get return isappreciation (Increase in price of stock over time) value of stock which may nothappen and you may lose your money if stock price goes low or company goesbankrupt(The company is closed or financially ruined).
  2. 2. What is a market? It is common place where supplier and buyer meet. Suppliersales product and buyers buy paying money. Likewise there is a market wheresellers are selling stocks and buyers are buying. It is called stock market.Little confused, right ? Ok. Some people own stock of a company. Some peoplewant to buy it and the owner also wants to sell it. At common platform they meeteach other and exchange the stock ownership with money. This is stock market.Earlier, even now also in some places stocks are being traded in an Office like anyother shop. It is called Floor trading. You have to go there give money and get thestock certificate. This stock certificate is proof of your ownership. You have totransfer the certificate when you sell your stock. This trading platform is calledstock exchange.You would be finding difficult to imagine going for floor trading in such electronicage. Yes, Computer and Internet has brought the trading floor to your desk. Nowyou can buy or sell stock right from your computer. Now stock market is anelectronic market where you can buy or sell stock. It is called online trading.Organization providing platform for this market they are designated as stockbroker. We will go in detail about stock broker in subsequent chapters
  3. 3. Now you might be thinking about types of stock market. Well. Basically thereare two types of market.Primary MarketNow we are talking about buying and selling stock. We know that companiesare issuing stocks. Some people will be there who bought the stock first timeand then selling and buying process is going. The first stock which companiesissue to the investors is called Initial Public Offering (IPO). IPO market is calledPrimary market. It is almost same as later one. We will go in detail about IPO insubsequent chapters.Secondary MarketWhatever we have explained above as stock market is secondary market only.Here buying and selling process goes on for the pre owned stock. Someonetalking about stock market means it is secondary market.
  4. 4. As explained above stocks are trade in stock market. On floor orin exchanges. Stock exchange act as a market place for tradingstock through broker. You can buy or sell stock using your brokerwebsite. You can see the offer price and bid price for any stock inyour broke website or any application given by your broker. Thereare many third party applications also facilitating this.There are two major stock exchanges in India. i.e. Bombay StockExchange (BSE) and National Stock Exchange (NSE). Any companyhas to be listed in one or more the exchanges before issuingstock.
  5. 5. It is very interesting to see stock price changing. But how itchanges? Similar to any other products, Supply and demand makesstock price to change. No of shares is limited. Hence, if one stockhas more demand to buy then stock price will go up, similarly if onestock has more demand to sell then stock price will fall down.It sounds easy. But the difficult thing is to predict that when thestock price is going to up or fall. Knowing this only you will makebuy or sell decision. Many people say that no one knows whenstock price will change and some people say that by readinghistorical data or by drawing some chart it can be predicted tosome extent.
  6. 6. You should know what makes demand to rise and fall. Everycompany has to show his balance sheet showing financial detailsquarterly or yearly. If earnings have increased then stock price willmove up and on the opposite site it will move down. If some goodnews comes like Mega order booking, Director Change, then stockprice will go up, on the other hand stock price will go down if badnews comes. These indicators are theoretical, however there aremany other indicators used by investors to predict stock price.It is worth to note that, Investors’ attitude, sentiment, outlook andexpectation that ultimately affect change in stock price
  7. 7. Now that you learned about stock and stock market. But whycompanies issue stock? Why they are giving ownership to you?Obviously they are gaining something.At some point of time every company need to raise money. Theycan get money from two sources, either by debt financing or byequity financing. Debt financing is getting the money from Bank asloan or by issuing bond. In this, the company has paid back themoney with a defined amount of interest.In equity financing companies raise money by issuing stock. Itadvantageous for company because company need not paybackthe money or neednt to pay any fix interest. All that investor willgain is dividend and/or appreciation value of stock. Appreciationvalue means increase in stock price from the purchase price.
  8. 8. It is important to understand the difference between value of company andstock price. If one companys stock price is low that doesnt mean thecompany is small company.Let one company Xs stock price is Rs 400.00 and another company Ys stock isRs 1700.00 which company is bigger? You may be thinking company Y. It is nottrue. Stock price of a company doesnt give net worth of company. What givesvalue of the company is Market Capitalization. Market capitalization is themultiplication of Stock price with No of shares outstanding. We will tell youlater where from get these data.If no of shares outstanding for X are 2000000 and for Y are 300000, thenMarket capitalization of X is Rs 80, 00, 00,000.00 and Y is 51, 00, and 00,000. Socompany X is has more value than Y.So be clear that market capitalization gives current value of company, not thestock price
  9. 9. You know what stock is. Now you might be eager to know how many types ofstocks are available. Well, there are primarily two types of stock.Preferred Stock:It is stock with some guaranteed amount of dividend for ever. It gives somedegree of ownership in the company but with lower voting right.Common stock:It is the stock which is available for common people. Stock means Commonstock unless specified. Whatever discussion we have made about stock is forcommon stock. In this type you will get ownership on the company with noguaranteed dividend. Investors get one vote per share to elect the boardmembers, who oversee the major decisions made by management.In long run common stock give very high return by growth of value of stock.This gain comes with high risk that company may lose everything if runs in lossfor long time
  10. 10. You can earn money from stock in two ways,First, Appreciation value of stock: It is the increase in price of stockover time than purchase price. If stock price rises from thepurchase price, then you can sell at higher price and earn theprofit. Say for example, you have purchased stock of a company atRs 1000.00, after 2 months it became Rs 1200.00 and you sold it atRs 1200.00, then you earned Rs 200.00, i.e. 16%. Some taxes arealso will be deducted.Second one is, Dividend: Some companies, not all, Shares somepercentage of their profit as Dividends. Companies may pay ornot, there no guarantee or there no obligation that a company hasto pay dividend.Mostly earnings are expected from appreciation value of stock. Itfluctuates very high to both up and down side.
  11. 11. Many websites are providing stock price along with huge technicaldetails. If you see right side of this page "Get Stock Price"area, Write company name in the search box and press get quote.You will get current price. For further technical details you canbrowse, www.dailyfinane.com, they have huge financialinformation about many companies. There are many other siteslike www.moneycontrol.com, www.moneycentral.com etc.You mayn’t understand some terms like, Share Holdingpattern, 52week high low, Market capitalization etc. Dont worryleave it as it is, we will come back to these terms in subsequentsections.
  12. 12. Stocks are famous mainly due to the reason that they come with very highreturn. Mainly stocks assure the following advantages,1. Very high return2. You are getting ownership of a company with voting right.3. Flexibility, You can buy and sell stocks at any time.As usual, high reward comes with greater risk. It is same for stocks also. Stocksencounter the following main disadvantages,1. Very high risk of losing money.2. Tax is higher3. Broker commission and various fees are higherdespite of these disadvantages, due to historically higher return stocks are oneof the very good investment.
  13. 13. Buying a stock is only a click away. You can buy using your broker website or anyapplication given by your broker.First of all you have to open a trading account with any broker. Then relate youbank account with trading account. Now visit your broker site. Transfer funds fromsaving bank account to trading account. In the site buying option will be there. Inthe option fill the details like, stock name, no of stocks, order type etc. Then placeorder. If it is a market order it will be executed immediately, if it is limit order thenit may take some time or even may get canceled depending on market price, if limitprice is not reached.Market OrderYour order will be executed immediately in market price of the stock.Limit orderYour order will be executed based on your specified limit price. Else it will becancelled on closure of the market.After buying you stock details will appear in your account in your broker site. Youcan sell using sell form from the site. You can get familiar with this after openingtrading or demat account. It is too easy.
  14. 14. Ask your broker ! This is the best question for him….There is no formula to choose stock. Knowing the technical and historicaldata you need to make some analysis. There are two types i.e. Technicaland Fundamental analysis used to identify stock. But no analysis givescorrect result to pick a stock. Analysis can help to make a best guess. In thesubsequent chapter we will discuss about Technical and Fundamentalanalysis, how it can be used to select stock.Now, at this stage we suggest, you can go for your brokers suggestion. Yourbroker will suggest some stock to buy with back up details. Go through theback up details and make little research on the companys website to findthe healthiness of company. If you feel that you should invest at thatcompany then please go ahead. But dont invest too much amount withoutknowing how to analyze stock. For research you can invest little money.
  15. 15. There is no guarantee on return when it comes to investment instock. Some companies share their profit among investor regularlyi.e. called dividend, where as many companies dont do it. It is notmandatory for the companies to pay dividends.Other way (Mostly used) of getting return is when stock value rises.It is not guaranteed that stock value will rise. It may fall to the verydownside causing you to lose everything.Take example of Satyam Ltd. whose stock price fall down from Rs180.00 to Rs 50.00 overnight. But these happenings are very rare.
  16. 16. On the other side greater the risk has greater revenue chances. Youmay double the money with a year. Investment in stock soundsnegative to many people but historically it has very good return (i.e.app. 9 to 15%) over other investments.Risk can be minimized by experience and portfoliodiversification, but cant be eliminated. If you are ready to reap thehigher gain, challenge the risk
  17. 17. Understanding your financial position determines you success!!Can you afford to lose all your money invested in market? If yes thenyou can go forward, on the other hand you rethink about yourfinancial position. First of all make yourself stable, make your familyprotected from market declines and unfortunates.A 70 year old widow will be more conservative than a 30 yr executivewho has a full time income except investment. Hence age andfinancial position drives your investment strategy. Invest the moneywhich you can afford to lose. From the beginning, if you dont haveexperience or some degree in this stock market, then it isrecommended that you make it as part time work. After you getconfidence in investment you can take it as full time.Again, be debt free before investing. Dont invest money taken fromloan. Because if you lose money invested then you may come to theroad. Be careful! Always remember borrower is servant of lender.Avoid borrowing
  18. 18. Most of the investors dont know how much fees and taxes they arepaying. Fees and taxes vary from country to country, broker to brokerand depend on type of stocks also. Your broker can give you a clearpicture about taxes and fees they are taking. While opening demataccount ask your broker executive details on taxes and feesapplicable. Note it down.Keep a vigilant eye on transaction report for your entire buy andsell, see how much fees and taxes have been deducted. Taxes andfees are very high in stock trading. They kill you income. Specificallyif you are investing less money. If your investment is higher fees andtax amount is reduced little bit.But remember to ask your broker about fees and taxes and keep anargus-eyed look on transaction report.
  19. 19. Many investors who buy securities are unaware of the rights thatcome with stock ownership. Your must know your rights as a stockholder. While specific rights depend on the type of security, the lawsof the state/country where the company is incorporated, and the by-laws and charter of the company itself, some rights are standard.Investors who buy a share or shares of common or preferred stockare actually buying an equity or ownership interest in a company.The companys by-laws and charter set forth the rights of each classof stock holder. For example, a companys charter may state thatonly the common stock has voting privileges or that the preferredstock must receive dividends before any dividend is paid commonstockholders.The state where the company is incorporated (it appears on the faceof the certificate) also gives investors certain rights
  20. 20. Typically given in all states or countries are,(1) Vote on questions affecting the whole company.(2) Hold a proportionate ownership in the assets of the company.(3) Transfer ownership of their shares.(4) Receive dividends when declared by the board of directors.(5) Inspect the corporate books and records.(6) Sue the corporation for wrongful acts. And(7) Share in the proceeds of a corporate liquidation.In addition, most states also have laws about the kind of corporateinformation given to shareholders, and concerning the annualmeetings of shareholders.While state/country laws concerning these requirements are fairlyuniform, you should not assume that the laws of one state areidentical to another state. You should look up the specific state lawsthat apply to the company
  21. 21. The first issue of stock to public is named as IPO. You understood thatstock is a share of the company. You are purchasing it from someonewho already owns it. If you go dipper, there will be someone whobought the stock first. From where did he get? Off course from thecompany. This first stock issued by company to public is called IPO orInitial Public Offering. Afterwards those who took the stock they willsell to someone again someone purchase it from him and gamecontinues.If you are purchasing IPO means you are the first person to buy thatcompanys stock. Then you will sell it, someone will buy, he will againsell and the market goes on.Companies issue IPO in order to accumulate capital for their business.
  22. 22. Return in IPO is generally very high and very low too. If the companytakes market then you will be very rich. If you get IPO of goodcompany you will earn few time of the money in few months or years.You can buy IPO from your broker by their website interface afteropening demits account.Profit return in IPO sounds well hence everyone will try to buy, whomthe company will give. They will not give individual investors like youand me, because we are not the targeted market, it is institutionalinvestors who play the game and win the race. You will get if yourbroker allots something to you, this he will do if you are a regularinvestor.
  23. 23. If you get IPO without your brokers allotment? What??Cheers!!!....Sorry!! You got it because no one took.It is the institutional investors who play game. Why didnt they buy? Itmust not be profitable. Most of the time companies get capitalthrough IPO and fail to make profit. In such scenario stocks are soldbelow offer price or much below offer price and you will lose much ofyour money.Confused!!! Whether to go for IPO or Not ?It is recommended that you buy only when your broker gives someallocation. Not the stock which no one is buying, it is highly risky
  24. 24. Enough things you have learned. Further details will be explained insubsequently articles. Now its time to start. Once you start you willlearn the practical things. Starting is strongest huddle in development.I saw a fantastic sentence in a Gymnasium center in Rourkela, India."The best way to go ahead is to get started.“Just start, the work will teach you how to do it.Remember, “Experience is the best teacher”.The following 10 steps you can take for starting Investing in stockmarket.1. Decide how much money you are going to invest. Is it one time ormonthly or yearly or anytime? It is always suggested to investconsistently monthly basis or yearly basis
  25. 25. 2. Be sure that whatever money you are taking out for investment isnot affecting your living and you are ready to lose it. You may notloose but it is better to go by boat even though you can swim.3. Buy a computer with Internet connection if you want to be a goodinvestor and want to make considerable income from stock market. Itis not mandatory4. Read some E books, Information available on different website, seeinformation about different companies, acquire some knowledge inscreening the stock or selecting the stock, find out a broker takingcare of various features, be acquainted about use of MSExcel, Internet and MS word if you not . Take month time for theseactivities, dont be hurry. Remember, Knowledge is power.5. Open a bank account with Internet banking and cheque bookfacility.6. Open a demat account with the broker you have selected. Be clearabout their fees & taxes. Opening demat account are free with manybrokers.
  26. 26. 7. Go for a first step class to your broker, if they are providing.Understand you brokers website interface for trading. If you have anydoubt or confusion you can call to your broker and ask them.8. Decide your investment strategy. That is, how much you want toinvest in higher risk stocks, how much is lower risk stocks, how muchin Mutual Fund etc.9. Get stock recommendations from your broker. Normally they willmail you or you can get from their site after you login. Analyze a littlebit about that stock and decide whether to buy or not. Your brokerwill give, which stock to buy, what is the buying price and what is theexpected sell price, via newsletter or website.10. Place order form the website interface provided by your brokerand Buy. Remember: Keep eye on your stock price and marketmovement continuously and sell whenever it is favorable or you getrecommendation from your broker.
  27. 27. Note:In India, you can buy and sell stock in NSE & BSE till 3pm to 4pmdepending on your broker. After 3pm BSE will be closed and no orderwill be accepted. However, NSE will be "after hour" and you can placeorder, your order will be executed as soon as market opens. Avoidgiving market orders during after hours, because market may open ata lower price. Better to give limited order with limit price and stoploss. See below to know about Market order and limit order.

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