Steps To Know Before Buying Shares

Steps To Know Before Buying Shares

Here is a tutorial to help you get your basics right. Before you invest in the stock market, you must understand what it entails.

• How to invest in an IPO

1. You own a part of the business

When you invest in stocks, you do not invest in the market (despite what you think). You invest in the equity shares of a company. That makes you a shareholder; you now own a small part of that business without having to go to work there.

The good news is, since you own part of the company, you are entitled to a share in its profits.

The bad news is that you are also expected to bear the losses, if any.

That is why investing in shares is risky. If the company does well, you benefit. If it does not, you lose. There are no guarantees whatsoever.

• Read this before you buy an IPO

2. In the short-run, the price of the share can wildly fluctuate

Let's say the company fixes the price of each share at Rs 10. This is called the face value of the share.

When the share is traded in the stock market, this value may go up or down depending on supply of and demand for the stock.

If everyone wants to buy the shares, the price will go up. If nobody wants to buy the shares, and many want to sell them, the price will fall.

The value of a share in the market at any point of time is called the 'price of the share' or the 'market value of a stock'.

A share with a face value of Rs 10 may be quoted at Rs 55 (higher than the face value) or even Rs 9 (lower than the face value).

So you might have paid Rs 15 for a share which is now quoting at Rs 12. Don't panic and sell. If it is a good company, the share price will eventually rise.

The prices will get influenced by the market sentiment and the general direction of the market. As a result, you may see short-term slumps.

• What you should know about mutual fund IPOs

3. Always invest for the long-term

The best way to make money is to buy low and sell high. This means you should buy the share when the price is low and sell it when it is high.

That is why you must buy in a bear market. This is a term used to describe the sentiment of the stock market when it is low and the prices of shares have generally fallen. The best time to sell is in a bull market, when the sentiment is high and the prices of shares are rising.

But it is very difficult to time the market. In fact, no one can do it. If we could, we would all be millionaires, wouldn't we?

That is why, when you invest in the market, it is best to invest for the long-term. Hold on to your shares for a few years before you think of selling them.

Companies increase their sales and book higher profits over the years. This will eventually reflect in the share price, so ignore the short-term slumps.

Once you decide that you are in for the long haul, you can ride over the bear and bull runs with no stress at all. Over time, the price of your shares will appreciate.

If you are getting a good price for your stock, keep selling small amounts at regular intervals. Keep booking profits.

• Why you need a stock broker

4. Decide how much you want to invest

Always remember one basic rule in finance -- if something gives you higher returns, that's usually because it carries a greater risk.

That's the reason why not-so-good companies will pay you a higher rate of interest for your deposits.

The same reasoning goes for stocks too -- they give higher returns than, say, bank fixed deposits because they are more risky. So the amount of money you invest in the market depends on your capacity to bear the risk.

If you are young with a steady job, you can invest a larger proportion of your income in the stock market than, say your parents who are close to retirement. If you have a lot of debt to repay, avoid putting too much of your money in stocks.

It's best to decide how much of your savings you will allocate to stocks, and stick to that plan. Don't get swayed by how much your friend is investing.

• How to get a broker

5. Don't rely solely on 'good advice'

A smart investor should never invest buy shares of companies he doesn't know much about. Relying on 'advice' from friends is not always a great idea. Do some groundwork yourself.

It doesn't matter who is buying the stock or who is recommending it. Steer clear of such ways of making a fast buck. These tips will land you in a soup.

When you hear of a 'hot tip', dig further.

Take a look at the company's profit and loss statement, which would have been audited by chartered accountants. There is a wealth of information here. To understand the information in a Profit & Loss Account, read Want to buy a stock? Read this first.

Do some basic calculations on your own. The Earnings Per Share (net profit/ number of shares) and Price/Earnings ratio (market price/ EPS) should give you a fair understanding. Read How to spot a good stock to understand what these ratios mean and how to use them.

These tips should get you started. Tread cautiously though. If stocks intimidate you, consider a diversified equity fund.

A mutual fund manager will research many companies before investing in their shares. This way, you can participate in the stock market even as you leave the research to professionals.

Courtesy:Rediff

A Stock Exchange

If I am a private citizen who owns a restaurant, and I am selling my restaurant stock to other private citizens in the community, I might do the whole transaction by word-of-mouth, or by placing an ad in the newspaper. This makes selling the stock easy for me. However, it creates a problem down the line for investors who want to sell their stock in the restaurant. The seller has to go out and find a buyer, which can be hard. A "stock market" solves this problem.

Stocks in publicly traded companies are bought and sold at a stock market (also known as a stock exchange). The New York Stock Exchange (NYSE) is an example of such a market. In your neighborhood, you have a "supermarket" that sells food. The reason you go the supermarket is because you can go to one place and buy all of the different types of food that you need in one stop -- it's a lot more convenient than driving around to the butcher, the dairy farmer, the baker, etc. The NYSE is a supermarket for stocks. The NYSE can be thought of as a big room where everyone who wants to buy and sell shares of stocks can go to do their buying and selling.

The exchange makes buying and selling easy. You don't have to actually travel to New York to visit the New York Stock Exchange -- you can call a stock broker who does business with the NYSE, and he or she will go to the NYSE on your behalf to buy or sell your stock. If the exchange did not exist, buying or selling stock would be a lot harder. You would have to place a classified ad in the newspaper, wait for a call and haggle on a price whenever you wanted to sell stock. With an exchange in place, you can buy and sell shares instantly.

The stock exchange has an interesting side effect. Because all the buying and selling is concentrated in one place, it allows the price of a stock to be known every second of the day. Therefore, investors can watch as a stock's price fluctuates based on news from the company, media reports, national economic news and lots of other factors. Buyers and sellers take all of these factors into account. So, for example, when the FAA (Federal Aviation Administration) shut down the company ValuJet for a month in June 1996, the value of the stock plummeted. Investors could not be sure that the airline represented a going concern and began selling, driving the price down. The asset value of the company acted as a floor on the share price.

The price of a stock also reflects the dividend that the stock pays, the projected earnings of the company in the future, the price of tea in China (especially Lipton stock) and so on.

Courtesy:Howstuffworks

Finding Stocks to Trade

Producing a stock newsletter every night requires finding good chart patterns on a regular basis for members of my service. My inbox is frequently full of inquiries of just how to go about finding chart patterns for trading. The short answer is that I look for them!

Each afternoon following the market close, I use TCNet by Worden Brothers to scan for stocks which meet a variety of criteria. This tool is essential to my finding good trade setups for my own trading and for my newsletter. Because I trade the stocks in my newsletter, I want to find and highlight only the best technical setups.

The scans I run are basic, filtering out the low volume stocks and cheap stocks which don’t move enough for short-term trading. I generally will cut out all stocks below $10.00, and will rarely look at a stock with less than 250,000 shares/day average. This leaves me with a large list of stocks which have adequate volume for getting in and out of trades with minimal slippage, as well as stocks which have a larger range of movement.

From this point, I sort the list according to how strong or weak the stocks closed that day. Stocks which finished at their highs for the day are at the top of the list, and stocks that closed at their lows of the day are at the bottom of the list. Sorting stocks by this method helps me to find more long trading candidates at the top of my list, while finding more shorting candidates (weak stocks) at the bottom of my list.

Finally, it takes time. TCNet allows me to quickly scroll through all stocks in the list by hitting the spacebar. I generally will end up with about 1500 stocks in the list, which takes me a little over an hour to manually review. The rate at which I go is fast, because I am flagging stocks as I move through the list. At the end of the review, I am left with around 40 stocks which I will look more closely at to locate my swing trading picks for the following day. My final selection is based on market direction, the momentum of the stocks in the list, and how clean each chart looks to me as a trading candidate.
Courtesy:www.thestockbandit.com

How I Select Trades

How I Select Trades

Successful trading is about managing trades once you are in them, regardless of where they came from. I think a great trader could probably turn a profit taking random trades, as long as he manages them well. Now I do believe that finding quality chart patterns is essential, mostly because trading good setups in liquid stocks allows for the best risk/reward relationship on the front end. That is why I run my swing trading website – to highlight the best charts in the market for potential trades. My trade selection process is based on my ability to manage those trades, therefore I want to find only the best. Why not predetermine your stop in case you are wrong by taking the trades with a natural stop-loss nearby?

Having said that, let me touch on the last comment regarding stops. One of the first things I want to know before I take a trade is how much I am likely to lose in case I am wrong (and I will definitely be wrong some of the time). This helps me to determine two things: position sizing and profit expectation. If I am willing to lose $1000.00 on a trade and the natural stop is 1 point away, then a position size of 1000 shares will be obvious. Furthermore, if I want to keep my reward-to-risk relationship at 3 or 4 to 1, then I would look to pull at least 3 times my potential loss out of the trade on the profit side. This would be a 3 point profit for this example.

Now, how do I go about finding those trades? Each night I begin with all the stocks in the market and run some basic scans on them which filter out the low-dollar stocks and the low-volume stocks using TCNet, my charting software. Once I have the remaining list, which is typically about 1600 stocks, I sort that list by their close relative to that day’s range. This simply means the stocks at the top of the list finished the day near their highs, and the stocks at the bottom of the list finished near their lows. Sorting by this helps me to first find my likely long candidates and then move on to the short candidates, as I typically like continuation plays. Once the list is sorted, I use the spacebar to screen each stock in pretty rapid succession. Going through the list takes me about an hour. Simply scrolling through so many stocks each night also helps keep tabs on the overall market health.

As I move through the list, I keep a finger on the “F” key and “flag” the stocks which are good enough for a closer look. After screening the big list, I am left with about 50 flagged stocks which I look closer at to determine my trade candidates which will be in the swing trading newsletter. It is at this point that I separate the good from the great. I want stocks which are able to move. A stock like MSFT which sees daily changes of only a few cents is just not a candidate. I want potential for a good, quick profit. I also want to find tight setups where my stop is nearby. A wide, sloppy chart will add slippage and make it more difficult to know when to exit. This is why I often overlook momentum stocks which have already broken out. Why make trading any more difficult than it already is?

Volume is the next thing I will really key in on, as it is the best true measure of activity and just what the “big boys” are doing. Does volume support the overall look of the chart? Has there been more activity lately than normal which may indicate a move is about to occur? If so, then that stock makes my list.

When looking for shorts, I want to see lower highs, downside volume and relative weakness to either the market or that particular stock’s sector. This indicates to me that pressure remains on the stock and the path of least resistance is still down. Any stock that is unable to participate in market strength gets my attention quickly.

The next morning, I set alerts in my CyberTrader Pro trading platform which will trigger when the stocks from the newsletter meet their breakout prices. Most of the time, I set these alerts to actually get me into the trades automatically for at least a partial position. I also set up my watch lists in Trade-Ideas Pro, which helps me to gauge momentum and relative volume. Their product is excellent, and is an essential part of my trading.

As the day progresses, I keep a close eye on market activity (or inactivity it has seemed to be lately). If buying is strong and the futures are holding up well, I will add to longs in expectation of strength (vice versa for shorts). If the futures are flat and choppy, then I cut way back on my activity and grab a good trading book. Watching the market action with this in mind helps me select which trades are worth adding to and which are not.

From there, it is all a matter of execution and sticking with a good, disciplined trading plan. Cutting losers and keeping winning trades on my screen is the only remaining part of my job once I have found the trades, which is also the most important part!

Courtesy:www.thestockbandit.com

How to be a Stock Market Expert in Ten Minutes

How does one choose the best stock? How does one time the stock market to make maximum returns? How does one double their money quick in the stock market? Volumes can cover trial and error methods of stock market investing and still not address these questions. As an investment advisor these are just a few questions that I came across on a daily basis. If I knew the answer to these I would be tanning in the Bahamas rather than spending a mundane workday answering the same questions day after day!

This misconception is because the average person views the stock market as a roulette table. Nothing is further from the truth. The stock market is extremely predictable. In fact with the right approach anyone can ensure returns that are higher than any other investment option such as bonds, real estate or gold.

This article is not a promotion for shares of any particular company, but will provide guidelines to help a prospective investor narrow down investment options.

To understand this little better lets look at the stock market in another light.

When starting a business there are two ways to raise capital –

1. Loaned capital: This is borrowed money that is repaid with a fixed rate of interest within a stipulated time. The loan is returned immaterial of whether the business flourishes or not.
2. Owned capital: This can be either the entrepreneur’s own money or money pooled in by family members, brothers, friends, etc. The share of each person in the company is in proportion to the investment contributed and therefore profits, after all expenses have been settled, are distributed proportionally.

Another option, which is a subset of owned capital, also available to an entrepreneur is to float shares of his company and raise his capital requirements from the public at large. This means that everyone who invests in shares has an ownership claim in the company to the extent of their investment.

Voila! Here we have the basic framework of the stock market!

To choose an investment strategy, the first factor to determine is the time frame of the investment. All equity investments should be ideally looked at with a time horizon of at least five years or more to reap optimum benefits. Is this a double or triple your money guarantee? Absolutely not! Now, since we understand the concept of a share, the returns to expect should always be in line with the growth potential of the company. A company cannot grow at 12% year after year for the share price to climb by 50%. Short term volatility in the stock market may see fluctuations to this degree, but over a period of time this volatility irons out to a flat rate of return that factors in profits and the growth potential of the company. Sentiment may run the market in the short term but long-term returns are always driven by fundamentals.

The time frame of the investment would also depend on the age bracket of the investor. A young executive starting his career can look at a higher exposure to shares whereas a senior citizen may not be comfortable with an irregular income and fluctuations that may erode the capital invested.

The next important factor in determining what kind of stock to invest in is to identify the objective of the investment. Is the investor looking at companies that pay high dividends or companies with a high growth potential? Companies that do not pay regular dividends are not always undesirable as these usually plow back profits into expansion plans and other growth potentials resulting in more aggressive returns than a high dividend yielding stock. This decision would depend on the investor’s appetite for risk as taking higher risks have the potential to earn higher returns.

The industry outlook for the medium to long term would also help determine whether to follow a growth strategy or a dividend yielding strategy.

Once this is identified, the next step is to decide what kind of company to invest in. Should it be small or large, an established one or a start up? Again, the thumb rule is higher risk leads to a potential for higher returns. Smaller companies are always more volatile and also have higher risks involved as they may not be able to tolerate high fluctuations during a downward market swing.

Finally, how does one time the market correctly? Fortunately there is no such thing as bad timing in the stock market. There is good timing, better timing and extremely lucky timing! Good time is investing at anytime without giving index levels and market sentiment a thought. If you put your money in during the Harshad Mehta peak or even the technology boom, you would have been handsomely rewarded for just sitting out the bad times.

On the other hand, with a little effort you can make an educated guess on whether you can get a better timing opportunity. This is called the PE ratio method of investing. PE is the price to earnings ratio of a stock. This is calculated on the present price of a share divided by the earnings forecasted for the company based on expected projects, work in progress and expansion plans. The lower the PE ratio, implying that the price is low for high earnings expected, the better the time to buy the stock. After viewing the average PE of the industry, the stock chosen should preferably be below or equal to the industry average. A higher than average PE indicates that the stock may be expensive.

Again, PE decisions cannot be made in isolation. Different industries have varying PE averages. The banking sector may have PE averages as low as 4X while IT can go up to 35X. This does not mean banking stocks will give better returns than IT. Trend forecasts and industry expectations should be the deciding factor here. PE ratio is only an indication of whether the stock price is too high to buy at present.

When investing savings with a business opportunity a few questions that come to mind immediately are

1. Is it safe?
2. Are the owners / initial contributors reliable?
3. What is the nature of the business?
4. How long have they been in this business and what is their area of expertise?
5. What are the short, medium and long term plans of the company?
6. How much return to expect?
7. How long before it starts making profits / paying out returns?
8. What is the industry outlook for the business?

These are the same questions to ask when finally choosing a stock.

In the past we have seen markets steadily rise over longer periods. Without active management we have seen the BSE Sensex climb from 100 in 1980 to 12000 in 2006. This means that if anyone had invested Rs. 100 in 1980, as on 1st June 2006, it is worth Rs. 10071 (which is considered a down market, if today is taken in isolation). This is approximately 20% compounded annually. The market peak during the technology boom was 6000; today’s down market still looks good in comparison.

Keeping these insights in mind, do not forget to invest some money today so that you can reap the benefits when we cross the 50000 mark on the BSE Sensex 20 years from now.

Courtesy:Chillibreeze