5 Things to check while you are buying a new stock
Investing in the stock market is one of the most exciting areas in the trading business. But before start trading in the stock market, here are a few basic things that you will require to know before or while you invest in a new stock:
Know that you own a part of that particular business you are investing in
Most people have the misconception that investing in stocks is equal to investing in the market. In reality, you are investing in stocks and not in the market. Stock trading means investing in the equity shares of a company. This makes you the shareholder of the company whose stock you are buying, and this makes you the owner of a small part of the business. When you invest in stocks, you become a part of the profits and the losses that company suffers. Therefore, investing or buying new stocks of a company requires an in-depth knowledge about the performance of that company.
The price-earnings ratio (P/E ratio)
While you invest in the stocks of a company, it is important to understand and to know the P/E ratio of the company. It is important to keep in mind that even a new company that shows promising growth is capable of giving you huge profits on your investment. You can get to know the P/E ratio of the company by comparing the current market price of the company with the cumulative earning of that particular company in the endmost four quarters.
The concept of beta might seem to be a complicated, but this is not the case. Major providers of stock data will give you an idea of the beta on the same page where you will find the P/E of the company on whose stock you will to invest. Beta is the risk indicator. If a company has a high beta, it can give you high returns but can also give you huge loses. Investing in a low beta company is associated with less risk. Investing in a low beta company is safer for newcomers because of the low-risk factor.
Keep a close eye on the market
Always keep an eye on the market to know when the stock you desire buying reaches the best buying price which will enable you to earn high returns. Therefore, while you buy a new stock do not forget to study the market closely and if you cannot do so, try and get an expert's opinion on the subject.
Buy what you know
This is the best thing that you can do for a safe trading while you invest in stocks. Investing in the stocks best known to you will lower your chances of an enormous loss.
Six steps to create a great financial future
Making your financial plan? Do you want to invest for your future and make your money work as hard as you do? The best person who you can emulate is a financial planner. Certified financial planners follow a six-step process while they devise and implement a financial plan for their customers.
The Six Steps of Financial Planning
Determine the goal and purpose:
The focus of this step is to find the base for planning itself. It is important to know your destination before you start the journey. The steps in the right direction will only take us to the desired destination. A certain degree of awareness of the stock market, financial strengths, weaknesses, future goals and plans, etc. is essential. It is important to understand yourself to be able to determine your future and plan your finances accordingly.
Data gathering or collection:
This is a step where you gather all the information about your finances. You also determine data about your financial goals. Questions one must ask themselves are:
- What financial goals do you want to achieve?
- In how much time do you want to accomplish these aims?
For instance, if you want to collect information for your retirement plan, you need to understand annual income, savings rate, years left before you retire, your savings till date, your future major expenditures, expected a rate of return, etc. One must write down this to be able to visualize the data for the next steps.
This is a step where you start analyzing the data you have at one place. This will initiate the planning process with some basic assumptions. Suppose you have saved 1 lakh rupees until now. You have 25 years until retirement. You want to save ten lakhs before you retire. How much would you be able to save each month? What rate of interest would you need to invest it for you to arrive at the retirement corpus? You have to use a financial calculator to be able to determine these figures. There are many financial calculators available online which will work out the numbers in seconds.
Develop the plan:
Now you have all the calculations and figures with you. You can start developing the plan. Here you can use the help of a financial advisor, or you can also do it on your own. You have to understand the various instruments of investment before you start investing. If you want to be aggressive, you can invest a part of your funds in equity or mutual funds with high returns. Similarly, you can also choose medium risk or low-risk mutual funds if you feel you do not want to take high risk. You have debt options too which pose no danger. However, the rate of return for these is also small. It is wise to strike a balance between high, medium and low-risk investments and make decisions to be invested in all of these. Depending on your plan you can choose the quantum of investment in each.
Implement the plan:
Now that you have all the calculations and allocations in place, you need to carry out the plan. It is important to invest regularly and stick to your investment plan. Procrastination and delay will affect your funds and plans significantly. You have to be disciplined and get started to reach your goals.
Monitor the plan:
It is important to follow the plan regularly. One cannot implement the plan and forget about it. Many factors can change your plans, and you will have to make the necessary modifications. Personal factors like emergencies, expenditures and career changes can affect the program. External factors like political changes, national elections and economy affect the performance of investment instruments. It is important to tweak the plan and make necessary changes in your investments accordingly.
Basics Of Stock Trading
Not a day goes when we don't hear of some activity from the share market. Every little political happening seems to affect the Indian stock market in some way. But very few can claim to have an understanding of the trading in shares system. Some dedicated trading apps request to simplify everything to the layman, but only a few succeed in doing so.
Maximizing quick profit:
Trading has turned out to be a brilliant and attractive way to earn profits off late. It gives an opportunity to the trader to use his wealth in a manner to maximize his profits in the short-run. Instead of getting into the usual buy-and-hold investing, the trader tries to benefit from the fluctuating price of securities.
Must-Know Rules of Trading:
Trading is not rocket science as some people enter into it and earn profits fairly quickly by application of prudence and common sense. It is rather difficult to sustain profits from it. Regular profits from trading require patience and the wherewithal to remain in the business. There are some thumb rules that traders need to keep in mind to maximize their chances of earning from share market.
- The casual trader will do himself good if he approaches it as a business.
- He needs to have short term as well as long term goals.
- He also needs to consider the capital that he is willing to invest in the said business.
Furthermore, he needs to have an idea of the commodities he will invest in. However, it goes without saying that there are no set rules for trading and they need to be molded to fit the needs of the one trading. This requires research on the part of the trader and constant changing of the game-plan. Some stock trading platforms and websites are available for the purpose.
- While researching on the market may cause anxiousness for traders at the time of entrance, it is an inexorable part of a successful trading plan.
- New traders should always keep their focus on price. That is one crucial thing every experienced trader insists on. Two things in regards should be given consideration
- Sometimes buying stocks of a company which is running poorly can also turn profitable as an experienced one knows when to jump the ship, so to say.
- These short-term profits go a long way in contributing to the overall wealth of the trader.
- Traders require to be fast on their feet and to be able to think pragmatically, meaning thereby, that they should stick to stocks that are traded actively. This is like a golden rule for traders at the beginner level.
- New traders need to build up on their understanding of the markets, through reading books, articles and following the trends to enhance their knowledge.
One of the basic mistakes made by new traders is that they try to out-think the market. But it needs to be understood that things can go astray very quickly in stock markets. Hence due diligence is necessary before jumping into the trading sea.
Guide To Become A Successful Investor
Investing in the share market can prove to be bountiful if done right. You must have heard people telling tales of how they made lakhs of rupees by just investing a small amount of money. At the same time, you must have heard people talking about the time when they lost their lakhs of rupees while trading in the market. Where did they go wrong? What will it take for you to be a successful investor?
There are certain things you must understand before you start investing in the share market to increase your prospects of being a successful investor:
As you are new to the investing game, you should start by investing a small amount of money. Take that sum as a "tuition cost" for you to understand the basics of the market. There is a fair chance that you can lose this money as you are still learning about the market and its conditions. Try to keep this "tuition cost" as low as possible. If you earn a profit on this investment, increase the amount in your next investment. If you incur a loss, analyze the mistakes you made and try again.
Diversification is said to be the primary priority of every successful investor. It follows the old saying that you should never put all of your eggs in one basket. Avoid investing all your money at a single place; instead spread it over a range of securities of multiple companies. The share market is volatile; if the company you have invested in tanks, you will lose all of your money.
Let's assume that you want to invest Rs 1,00,000 in the market. Following the diversification strategy, you have invested Rs 25,000 in four different companies. If two of your investments go bad, and you lose Rs 50,000; you will still earn a profit of Rs 75,000 on the other two. You have minimized your overall loss and still, have made a profit of Rs 25,000 on the whole transaction. Had you have invested Rs 1,00,000 in one company, you would have ended up losing all your money if the company tanked.
Following the herd
When you are new to the share market, you come across many potential investors giving you free advice for no reason. In their opinion, shares of a big company mean definite profit. This theory is not correct. It is true that a big company is the most probable candidate for earning you big bucks, but investing in a company just because everyone else is investing in that company, will lead you to the path of massive losses. Investing in securities of a company can be perfect for someone but a money killer for you. Nobody knows your financial goals and your situation better than you. So believe it when you hear that you are the most qualified person for yourself to be giving investment advice.
Understanding the market
Investing in something you don't fully understand will only lead to losses. It is advisable to hire a broker for providing much needed financial guidance. To minimize your "tuition cost" in the beginning, look for a brokerage firm that charges a flat brokerage fee rather than a hefty commission.
The safest way to avoid losses and to be a successful investor is to know what kind of investor you are. It would include understanding about certain things like:
- The amount of time you can give to investing.
- The amount of money you are willing to spend.
- The amount of money you are comfortable losing.
- The amount of risk involved in various securities.
- The amount of profit you would want to achieve your financial goals.
- Your understanding of the market and its ever changing trends.
Once you have understood the basic structure of the market, you can start investing money and try your hand at making money.
6 Tips To Start Investing In Stock Market
Equity Trading is not a game. When you start reading and learning about it, you will see that it is a profession in itself. Before investing, an individual needs to know a few basics and risks associated with it. This has to be done before you start to trade in real time stock markets.
Here are 6 tips to give you a better idea about stock markets and get you started on this investment journey:
Don’t Invest Your Savings:
Stock markets are known to be high-risk investments where there is no guarantee of receiving your principal investment back. Hence, it is wise to not get sucked into the lure of higher returns. It is advised to invest in the stock market only once you have other savings that are more secure. Having fairly secured your future, you can then afford risks and make a move towards the stock market.
Maintain Investment Discipline
Fluctuations in prices are nothing new within the stock market. This volatility in the market has sometimes caused a lot of investors to lose their money. Also, timing the market in such conditions becomes a tough task. To avoid losing your money, one can adopt a disciplined approach towards investing. Systematic Investment Plans (SIPs) is one way of doing so. When you have discipline and patience in monitoring your portfolio, chances of generating great returns become brighter.
Manage Risk & Money Wisely
As an Investor, you cannot control the market but surely you can manage your money in every transaction you make. Even if you have a good trading strategy it can be all for nothing. You need to have money left in your investment as well. One of the best techniques of managing your invested money is by using the stop loss tool.
When the threshold value of your investment reaches between 5-15% the stop loss tool will automatically trigger an order. This order will release the investment and avoid further loss.
Hold Diversified Portfolio
The stock market is filled with companies from various sectors and fields offering many services. Diversify your stocks into different industries. This way if one industry of your investment is down performing, another might shoot up. You should focus on stocks of reputed companies that offer more guaranteed returns. However, keep a few stocks of newer companies that you trust to grow. This enables you to maximise your profits in the future.
Keep a Long-Term Goal
Stock markets are volatile in the short term but over the long term period they are less risky and offer better overall returns. Holding stocks for a longer time period is more likely to get you great returns. Hence, it is better to invest in stocks with a long term view rather than a short term one. It is a good idea to lock in money which you won’t need in the near future. This way if you sell the stocks when the prices are down you may lose money at the start but over the years the stocks tend to catch up.
Remember - A Stock is a Company
No matter whether you earn or lose it is important to remember the basic idea behind this investment. You are investing in a company that you trust and hope will grow in future. Hence, do not get caugh thinking of stocks as a game or gamble. Your money is invested in a real company, where real work has to be done for your investment to grow. It is, therefore, important for you to find out all you can about the company and find a right estimate of its future potential. You should also consider whether these goals align with your own investment goals.
Fundamental Research vs Technical Research For Stock Market
To gain better returns from the stock market and avoid losing money, one must research thoroughly before investing. This research would help the investor to decide where and how to invest, so as to get good returns. The research is done extensively on different parameters depending on the requirements. There are two types of research done in the stock market namely: Fundamental and Technical Research. Both of the methods serve the purpose of earning through stock market but are differently implemented and used.
Fundamental research is widely used by the investors. It is used as a beforehand analysis for long term investments. In fundamental research, more emphasis is laid on the value of the stock which is determined by analysing various aspects of the company.
In this methodology, the price of the stock does not hold much importance. Rather, the economic aspects and its effect on the company’s health are analysed. In addition to this, other important factors which could affect the stock directly or indirectly in the long term are also observed. These factors include the following:
- Financial Data: Financial data of the company such as balance sheets, quarterly results etc. are deeply analysed. This is to ensure the company’s performance in the long run. All the details in these documents are studied precisely so as to get a clear idea about the company. Revenue model, assets, and liabilities are also analysed to determine the company as a good or bad stock.
- Industry Trends: All the details related to the industry of stock are analysed. The scope of industry in future, factors affecting it and its growth rate are deeply studied. Patterns are made to predict the performance of the industry, and thereby the future value of the stocks.
- Market Competitions: To determine the hold of the company in the market even its competition is studied so as to make a complete evaluation. This would help in determining the strength of the company and its future growth prospects amidst the competition.
- Economy: The updates of the economic events are also taken into account. The economy affects the company, also affecting the future value of stocks. Thus, a proper track of economy and its effects are maintained and analysed.
Fundamental research uses the concepts of Return on Equity (RoE) and Return on Assets (RoA). The sources of the research data are mainly the financial statements. It oversees both the past history as well as the future aspects. Fundamental Research is crucial for long term investment. It is considered as a traditional approach where the value of the company remains prominent.
Technical Research is widely used by the traders. It is the analysis made before short term investments. In Technical Research more emphasis is laid on the price of the stock. The future trend is determined by rigorously monitoring the past values of the stocks.
A trend is determined by deeply analysing past and current value. Once a trend is confirmed, it helps in predicting near future values. Thus, a trader buys a stock at a lower rate, in an uptrend and sells off as soon as a decent price rise is observed. The factors which are deeply analysed are as follows:
- Price Movements: Price movements are rigorously monitored. Patterns of trends are made using these price movements. These are used to predict fluctuation and near future prices. The stocks are not to be held for a long time. So, more emphasis is laid on the margin obtained between the buying and the selling price. This margin is optimized by using analysis made by studying price movements.
- Market Psychology: Market Psychology plays an important role in short term price fluctuations in the stock. It is always better to analyse it to gain most out of it.
Technical Research is crucial for short term investments. It is a statistical approach where the price of the stock is prominent.
Both the research methodologies are important to gain in the stock market. But their process and objectives remain different in the above manner, which can be used as per the convenience. To gain maximum returns, try to implement both these methodologies before you invest in a stock.