Investing In Stocks
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.
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.
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 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
Reading the Stock Page
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
Figures are value of BSE Sensex