We hear many people talking about shares, about growing dividends and as to how their money gets increased exponentially. If you have some saved money, and some unfulfilled wishes complementing them to fulfill , then a good knowledge of the stock market can actually help you out making your money swell and achieve your dreams, whatever they may be, from buying a house in Bahamas to maybe buying a necklace for the mrs. Here my friend is a brief introduction of the Share market and how exactly this rocket-science functions.
Shares are basically bits or pieces of ownership of a company. Owning shares of a company lets you become a part of the growth of the company and reap a part of its profits in the form of dividends. A company initially lets out shares in the form of Initial Public offering. The IPO lets out shares of the company and on buying of these shares by the general public, the company gets its much needed capital in the form of money which it uses to expand its interests and hence the profits thus earned are divided between the shareholders of the company as well. Shareholders make money as share prices goes up and the company pays them dividends
Some important stock markets in the World are situated in Economic powerhouses such as The United States of America which has NYSE(New York Stock Exchange) and the NASDAQ(National Association of Securities Dealers Automated Quotations).The NYSE rather primitive in its approach and still has people roaming around carrying pieces of paper carrying of transactions by selling and buying shares . In contrast, The NASDAQ however uses electronic means of carrying out share business mainly because of the fact that it is younger than NYSE ,being set up in 1971. Carrying out of the functioning and different procedures of the share market electronically are done nowadays. The office of the NYSE makes up for a good background for news on financial matters across the world. India has its own Share market in Mumbai called the SENSEX, located in Dalal Street(which literally translates into Brokerage street).
Now, after a brief introduction to this system of buying and selling of bits of a company, here are some of the things that you need to know and keep in mind before you start investing your savings into the stock market.
10) Kinds of Shares
There are many different kinds of stocks based on market size and the size of the capitalization of the market. Therefore, there may be large cap shares or small cap shares. There may also be energy shares or technology shares, based on the kind of market. Therefore, a company investing in projects related to energy or technological development would obviously let out shares in its respective field and hence there can be a variety of shares available in the share market. An interesting kind of a share is the Blue Chip Share. A blue chip share is one which the people investing believe is a safe share to invest in, owing to its good growth and good returns potential/high dividends. The value of shares may rise or fall depending on stock spilts.
9) Stock brokers
Stock brokers are basically people who are licensed professionals that buy and sell shares, mutual funds etc for you through a brokerage account issued in their name by the company they broke or handle the shares for. They should not be confused for financial planners who manage finances of a particular company. They just execute trades on your behalf and charge you commission for the same, which is often lies in 5-10% bracket of the cost of the total number of shares that you invest in. It should be noted that some stock brokers have gone to become legends in the field of investments and have made a name for themselves all around the world. Example would be the great Chris Gardner, who, after an year of struggle in the NYSE and after living in abject poverty , made a name for himself by becoming the owner of the multi-million dollar firm , Gardner Rich and Co. The 2006 American movie , The pursuit of happiness , Starring Will Smith and his son Jaden Smith , is based on his struggle in the American stock market. Also, it should be noted that some investors do not hire brokers to deal with their brokerage accounts and hold their shares directly. This way it is easier to check on the dividends that are received by you and hence there is avoidance of mismanagement of money.
8) Ticker symbols of different companies
Ticker symbols are basically the abbreviations that the stock market uses in order to project the status of shares of different companies trading on that particular stock exchange market. Hence, Chevrolet Motors can be represented by CVR MTRs ,General Electric by GE, etc. They basically help the observer get an idea of the rates of shares that his/her company is trading at.
7) Fluctuation of Stock Prices
Stock prices fluctuate mainly because of the fact that the stock market is like an auction, where the investors constantly pouring in prices that they wish to pay for their shares.
6) Price to earning ratio of stocks
The price to earning ratio is the cost an investor pays for every 1 dollar of earning. If a stock is trading at 35 dollars and earns 3.50 dollars per share in profits, then its price to earning ratio would be 10.Investors should aim for a higher price to earning ratio to maximize profits.
5) Bear and Bull markets
Bear markets are those markets where the prices of stocks have crashed down by 20% or more, where Bull markets are those where the prices of stock rise by 20% or more. Hence, it is better for investors to invest in a Bull market rather than investing in a Bear market. Bull charges ahead and bear pulls you back, thus the analogy.
4) Non accessibility of stocks and shorting stocks
In olden times, if a company suffered losses, then in order to pay back those debts, it could charge the shareholder for his share and he would have to mail in a check to the company to pay out that particular loss incurred by the company. However, most stocks now are assess-able, which means that now the company cannot charge its shareholders for any losses and the shareholder cannot lose any more than he invests. If the investor feels that the price of a stock my fall, then he may borrow shares from other investors and sell them. Then, on reduction of price of that particular stock, he may buy back the shares and pay back his debt.
3) Dividend and the manner in which it is distributed
If the company makes a profit in its business venture, then the board of directors of the company, who basically represent the shareholders interest, vote as to how the profit is to be divided between the shareholders, owing to the fact that the company’s business earns capital from their money. Hence, if the Board votes to set the dividend rate at 2 rupees, then the price of the shares of that particular company will increase by 2 dollars. Hence, if a person buys 2000 shares of that particular company , then on profit of the company, he makes a profit of 4000 dollars. Thus, if the dividend yield of a particular company is 4%,then for every 100 dollars invested, you shall gain a dividend of 4 dollars. The dividend declaration date is the date when you receive your dividend for that share at the current prices after which the rate of that share becomes an ex-rate. A company may also give a property dividend, example sake a pen manufacturer sending pens in the form of dividends rather than a check. This, however , does not usually happen. The percentage of a company’s profit that get paid out to the investors as dividends is called the dividend payout ratio. Tax may be levied on dividends depending upon laws of a country.
2) Picking stocks-How to choose which stock to invest in
Although there is no magic formula regarding which stock can make you rich or which stock can get you the most returns. However, it is a well noted fact that blue chip stocks like that of IBM, Coca Cola etc, will get you steady money, although that is also possible in the case of smaller corporations. Some good methods to find out which stock to invest in would be to find out the financial pages headlines of some companies or develop you own methods to evaluate companies and dig into some companies with unfamiliar names to look out for companies to invest in.
1) Getting rich with investment in shares
Buying the right stocks can make you rich, very rich. Buying great companies for the long haul can pay you off with serious wealth. An example is as follows, at the time of Walmart’s IPO, the total cost of its first 100 stocks was $1650. After the next 18 years or so, these became 204,000 shares, each costing around 90 dollars .Hence, the total price rose to 1.8 million dollars of a $1650 investment.! Hence, this spells the magic of stocks and getting rich with adequate knowledge of investment in the right share.
So, STOCK ON MY FRIENDS!