Beginners Guide to Stock Market
Stock market is where shares of companies are
bought and sold by investors and traders. We know that companies issue stocks
to get funds to expand their business. This is called the Initial Public
Offering or IPO. A company’s main source of funds is through this IPO.
Once an IPO is over the shares no longer remain in
the hands of the initial buyer. These buyers may want to sell it to someone who
is willing to pay more money for the stock. So, a secondary market is needed
for this transaction to take place. This secondary market is called a Stock
Market.
Once it enters the secondary market, no money is
received to the company from subsequent sale and purchase of the stock.
However, the company will declare dividend on the stocks from time to time and
those who are in possession of the stock at that time will get the dividend.
Types of Investment: The Short
Term & Long Term
Most often people invest in stock market in two
different ways. One is the Short term way and the other is the Long
term. Both have its own set of pros and cons. Let us see which one is
better for you.
The Short Comings of Short Term
Investments
Short-term investment means that stocks are held
for only a short period. Profit is made from the short term fluctuations of the
stock prices. Those who invest in short term are referred to as Traders. These
traders keep a constant vigil against sudden price movements and of any news
that could make a huge difference in price of the stock.
By investing the Short term way could earn you huge
profits in a limited span of time. There are traders who make a fortune over
night. Just a single news or a change of guard at the company could signal a
rally which could turn the trader into a rich man within a few minutes.
However, there is a downside to this. The higher we
can earn,
the riskier it is. There are also traders who turned out to be a pauper
overnight. Besides, there will be news that could change the fortunes of the company for the
worse. If you had bet on a positive news and invested heavily on it, then you
will lose big time when the news comes out negative.
To be a successful trader you need to invest more
than just money. You got to invest your time and intellect as well. If there is
any chance to make money in the short term, you got to be a full time trader.
It is quite impossible for those who have other jobs and careers to sit in
front of the computer and look at the price variations.
More than that, you need to do continuous research
on the company, about the current market situation, the news that might affect
the price of your stocks, the political situation, and the interest rate
whatever. It is like keeping updated about everything under the sky. Now how
will you juggle all this with the pressure of your full time job? It will be an
exercise in stress and patience. Therefore, if you opt to trade in the stock
market, the best thing is to be fully involved in what you do. In addition,
pray a lot because you really need God on your side to keep that luck going in
your favor every time you buy or sell your stock.
The Long Run Benefits of Long
Term Investments
Long term investments on the other hand hold
stocks for a longer period with a belief that business improves with time
and thus the stock price too moves upward. Those who invest in this method are
called Investors. They are never in a hurry to make money overnight. They
believe that patience is a virtue.
Moreover, there are some benefits of holding your
stock for longer periods, which a short term investments doesn’t provide. History witnessed that greatest multibagger stocks performed in long term investment only.
Dividends: When companies are performing extremely well, the
management decides to share the profits with the share holders. Thus they
declare dividends on the shares. Some good companies declare dividends
regularly that are a source of income for the shareholder. If you buy a stock
for a long period, you will get a regular flow of income from these dividends.
You might like also: Why you should avoid high dividend paying companies
Bonus Shares: Just like dividends, the company also declares
bonus share from time to time, which is another source of income. Existing
shareholders are offered with free stocks of company in the form of bonus
shares. Short-term investment buys and sells shares within a short period thus
usually missing out when bonus are declared. They might have already sold the
share before it was declared.
Stock Splits: Sometimes companies increase the number of shares
but keep the capitalization same to increase liquidity. This happens when the
price of shares increases manifold and it becomes expensive for small time
traders and investors to buy it. This lowers the liquidity of the shares. Which
is easy for you to buy; a share at Rs 2000 or a share at Rs.50?
By being a long time investor you can have your
stock split when the company declares it. Though the capitalization is same,
you can profit from it over time because now you have more than one share of
the company from which you are getting your income.
Decreased Capital Gains Tax: You can enjoy decreased Capital
gains tax if you hold the stocks for more than one year. This helps you to save
on tax and thus increasing your income.
Increased wealth if the stock does well: Mostly stocks are on the rise in
the long run because as with every business, it takes time to build up a
thriving company. The company stocks may take a beating or rise rapidly in the
short term. If you can keep your cool through it, you can make a huge fortune
by the wealth the stock makes for you in the end.
If you are planning to invest in Stock Market and
is not willing to part with your present career, it is better you stick with a
long term investment strategy. That will do you immense good. It could turn out
to be your
retirement fund. However,
make detailed study about the company and its future prospects as a business in
the long run.
The good news is that you need not spend all your
waking hours trying to find out in the news or elsewhere about the price
movement of the day like a short time trader.
How to Diversify your Investment Portfolio?
The
Perfect Investment Diversification Ratio
There are magical numbers in life. No wonder
we think twice before choosing the number ‘13’ and choose the number ‘9’ or
some other lucky number. In the world of investments, there are numbers that
can turn out to be quite fortunate, which means these numbers will give you
better returns.
The Lucky Number
The ‘60:30:10’ is a number as well as a
ratio that is considered ‘lucky’ in the investment world.
This is considered lucky because financial experts
believe that if we allocate our investments to Stocks, bonds and gold in this
ratio, we can get a return of 15% during times when stocks perform well.
Moderate performance of the equity markets will turn out investments in the
range of 12% to 15%.
You may think what’s so hot about this. After all,
it’s only natural to think that if you had invested all your investments in
equities, you might have received much more returns than this. However, you
make the usual mistake while thinking like this; you fail to factor in the
risk. Putting
all your investments in stocks alone could attract that much risk, which you
might not be ready to face.
60% in Stocks: While investing according to this ratio, you are
effectively diversifying your investments in such a way
that your risk is reduced and your profits maximized. 60% of your investments
in stocks is from where you are supposed to get the maximum amount of returns
during a good year.
30% in Bonds: The next 30% in bonds are considered to offset
your risks in stocks. This helps you not only to reduce your risks but also to
get moderate risks that could augment your income from stocks or supplement it
when stocks are failing. You would be the wiser if you see to it that you
invest in Government bonds together with corporate bonds.
10% in Gold: The next 10% is invested in gold and with good
reasons too. With the recent performance of gold, it has emerged has the most-demanded-investment
option in a portfolio kitty. From the beginning of this century, this metal has
risen by an astonishing 528%! Now who would not want such a
high-performance asset?
Another benefit of having gold in your portfolio is
that it is a sure bet against inflation and its effect. You are familiar
with the fact that inflation reduces the value of money. You need to invest in
something that doesn’t go down in value. Gold is something that doesn’t
depreciate in value, especially during times of recession like the one we are
facing now. Besides, when markets are not performing well, the returns from
stocks will also dwindle. In such cases, investing some money in gold is a good
idea.
Investing in physical gold will not yield returns,
though. The profit is made by buying gold at low prices and selling at high
prices. There are no returns for holding it as is the case with stocks (you get
dividends for holding it).
How to Use the Lucky Number for
Conservative Investors
What makes this number or ratio really special is
the fact this can be used by all kinds of investors, whether they are high-risk
takers or conservative investors. No matter what, the ratio stays the same. It
is only the investment options that need to be changed.
For high-risk takers, 60% of their investments were
invested in stocks. When it comes to conservative investors, they can invest
either 60% of their money in gold or in bonds. This reduces their risks
considerably, but a down side with this is that returns are also bound to
reduce.
Nevertheless, with the recent spike in gold prices,
it seems that gold can bring in high returns after all. Therefore, such an
investment during high inflationary periods will be useful to protect your
wealth from losing its value.
Investing 60% in bonds, which are a go-between gold and
stocks, is considered worthwhile for conservative investors, who do not mind
taking a bit of risk. It will give you timely returns unlike gold, which gives
you money only when you sell it.
Conservative investors need to just invest 10% in
stocks on account of the risk it posses. The 10% investment in stocks is just
required to get a decent amount of returns for the investor.
While investing in stocks it is better you invest
in a good mutual fund rather than investing directly. If you are adamant about
investing directly, then study your stocks well or invest in blue-chip
companies that have a history of high and consistent performance.
The 60:30:10 ratio doesn’t guarantee you a
fixed 15% returns for all kinds of investors. It is just that the ratio is the
perfect way to reduce your risks and maximize your profit. Any other
combination will either fail to minimize your risk or maximize your profit.
This is the perfect blend. So next time you think about investments, ensure that
you cook your investment meal with the right amount flavors added in the ratio
60:30:10.
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