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Investing In Stocks

You may buy shares of roughly 6,000 companies listed on the BSE or NSE, but your portfolio will only boast of a fraction of that.When you buy a stock in a business, you become one of its owners.

Print Edition: December 28, 2006

You may buy shares of roughly 6,000 companies listed on the BSE or NSE, but your portfolio will only boast of a fraction of that.When you buy a stock in a business, you become one of its owners. If the company does well, you may receive part of it profits as dividends and see the price of your stock rise and vice versa.The value of the stock depends on whether the shareholders want to hold or sell it and what other shareholders are willing to pay for it. Some stocks are undervalued, which means they sell for less than analysts think they are worth, while others are overvalued-the main determining factors being current stock market conditions and the overall state of the economy. Just remember that past performance is never a guarantee of future profits.


Kinds of stocks: Though the Indian stock market is not as mature as the US market where one can pick companies depending on one’s investment objective and horizon, some rough classifications can be made


INCOME Stocks that pay consistent dividends are income stocks—ideal for investors looking for regular stream of income. Most blue-chip stocks in India have regularly paid dividends for over a decade.

GROWTH Growth stocks are shares in companies that reinvest much of their profits to expand so may pay little or no dividend. These are meant for investors looking to building long-term capital.

PENNY

These stocks sell at less than their face value. Before investing in them remember that such companies may never make profit or may go out of business. But some have had high value appreciation.

BLUE CHIP Stocks in large, long-established and consistently profitable companies are known as blue chips, inspired by poker’s most valuable chips. Blue-chip stocks offer stable income and steady growth in value.

DEFENSIVE These are stocks of companies whose business is unaffected by business cycles (eg FMCG). It serves as a hedge against volatility in other stocks. In India, it can be any stock with good dividend payment.

CYCLICAL

Cyclical stocks are those that rise and fall with economic growth.The companies in industries such as cement, steel and sugar are good examples of cyclical stocks.

COMMON These are the regular equity shares of a company. If you own these stocks you share directly the success or failure of the company. If company profits are high, so will be your returns and vice versa.

 PREFERRED These are known as debentures in India. The dividend is fixed and is paid irrespective of whether or not there is a profit. Debentures can be convertible (into stocks) or non-convertible.

                                                                                                        DO YOU NEED A STOCK ADVISER? Here’s how to find out

Reasons why you should pick your own stocksReasons why you should not pick your own stocks
It is challenging  You think you are more qualified than the best managers (you are in the wrong profession then)
 You are curious about the business of investing You want control over your investments,which you think may happen if you understand the company
You possess substantial amount of money to invest in the marketYou think mutual funds serve only those who can't serve themselves by picking their own stocks
You are a buy-and-hold investor  You are prone to trading stocks anytime you want


Market Indices
No single index can tell you everything you want to know about the stock market.There are indexes to track different sets of stocks.The Indian stock markets are represented by the BSE (Bombay Stock Exchange, established 1875) and NSE (National Stock Exchange, 1993). Both have a family of indices that scans the market (visit www.bseindia.com and www.nseindia.com for details). NSE, though younger, now accounts for 65% of all stocks traded.

Reading the Stock Page
Even in the times of live stock tickers on television screens there is nothing to beat the comprehensive stock tables in the financial dailies for keeping up to date on what’s happening in the market. Here are some basics explained

Volume: The number of shares traded on the two stock exchanges in a single day

Scrip Code: Unique code assigned to a stock of a company by the BSE/NSE

 

Price/Earning (P/E) ratio: Shows the relationship between a stock’s price and the company’s earnings.A PE of 10 means the share’s price is 10 times its annual earnings

Open, high, low and close: These report a stock’s highest, lowest and closing price for the day

 Year low and high: These figures are available for the past 52 weeks and are reported daily.Whether it is a new high or a low is also indicated.The range between the prices is a measure of the stock volatility.The higher the volatility, the more you can lose or make money in a short time period

Dividend yield: This ratio shows how much dividend a company pays out each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock

Free float: This is the total number of shares publicly owned and available for trading. The float is calculated by subtracting restricted shares from outstanding shares. Stocks with small floats tend to be more volatile than others

BULL TRAIL
Wealth creation through economic reforms, two scams and four crashes

14,000
5 Dec 2006 

13,000
30 Oct 2006 

 12,000
20 Apr 2006

 

 

 11,000
21 Mar 2006
10,000
6 Feb 2006 
9,000
28 Nov 2005 

 5,000
8 Oct 1999
 6,000
11 Feb 2000
 7,000
20 Jun 2005
 8,000
8 Sep 2005

 4,000
30 Mar 1992
 3,000
29 Feb 1992
 2,000
15 Jan 1992
1,000
25 Jul 1990 

Figures are value of BSE Sensex

 

 

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