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IntroductionStockInvestment
Introduction
to Investing in Stocks and Shares
What
are
Stocks or Shares?
Investing
in stocks and share can be
extremely rewarding, if invested in a good company with able
management. Have said that, the definition of good company with able
management can vary largely depending on type of investor.
Stock
is simply a unit of ownership in
a publicly listed company on stock exchange. Generally when we say
that Peter owns some stocks, it means Peter owns some stocks in a
particular company. When we say Peter owns some shares, it means that
Peter owns stocks of more than one company. In other words shares
represents collection of stocks of more than one company.
Types
of Stock
Analysis
Fundamental
Analysis : This type of analysis relies on
analyzing the
financial statements of the company you want to invest into. This
involves quantitative analysis of the company's data on revenue,
expenses, assets, liabilities and all the other financial aspects of
the company. The historical performance of the company in all areas
that can be quantified is carried to decide, if investing in this
company has a promising future value. Investor's like Warren Buffett
relies on the fundamental analysis in order to determine the future
value of the company, and discount it to the present value, in order
to determine it current price that should be paid for the stock in
order to invest in the company. Annual reports of a company for last
10years can provide a good source of fundamental analysis.
Technical
Analysis : Technical analysis takes in
consideration
solely the price of the stock in consideration when making a
purchasing decision. many different charts are created based on the
price and the volume of the trading to identify a pattern in the rise
and fall of the stock and to by in when the trend is considered
favorable.
Best of Both
World Analysis : Some investors or traders use
both
fundamental and technical analysis in order to make the investment
decision.
Who
are You –
Investor or Trader?
Investor
: Investor simply would be someone who will buy quality
stocks, and hold them for years reaping the growth in the stock price,
and
dividend income. Basically, the investors would buy good stocks with
sound historical growth and would rely more on fundamental analysis
of the companies for making the investment decision.
Trader
: Trader on the other hand would be someone who buys and holds the
stocks for generally less than a year and for day trader it could be
few hours or even few seconds. Trader would heavily rely on the
technical analysis for making their investment decisions.
You
may find that whenever, we are
talking about investing, we generally call the person investor, but
it may sound more logical to call them investor only if intend to
hold their stocks for more than one year, & sometime as long as
20-40 years. An excellent example of an investor would be Warren
Buffett, who is the 2nd richest person as of
2006. Warren
Buffett follows value investing principles based on fundamental
analysis outlined by Benjamin Graham's teaching of value investing.
Any serious investor should read the bestselling books by Benjamin
Graham which are
The
Intelligent Investor -- By Benjamin Graham
Security
Analaysis – By Benjamin Graham
An example of a world
known billionaire
who predominently is a trader is George Soros. George Soros operates
Quantum fund that also invests for long term, however he would be
categorized as a trader based on most of this investments till date.
George Soros also is famously known as the man who broke the Bank of
England. In 1992, George Soros, made nearly $1bn by betting on the
devaluation of the pound sterling.
Short
Selling
of Stocks
Short
selling is simply selling the
stocks that you don't own will an intention of buying them back at a
lower price than it was sold initially, and keeping the difference as
profit. Short selling may appear to be cool strategy to make some
quick money, but comes with a high risk, and is should only be done
by professional who really know what they are doing. Short selling
is not offered by every stock broker and in country like Australia,
very large broker like comsec (also called commsec) can offer it to
clients. However, in US short selling is a very old concept, and is
widely practiced by stock traders, and stock traders like any other
investment vehicle.
Question
You
Must Answer Before Buying Stocks
- It is very important to identify your
preferred way of making money from for the stock market, before you
actually start investing.
- How much you want to invest?
- How long you plan to stay invested?
- What is the purpose of your investment?
- What type of investment personality you
have?
- What you believe will make you money,
trading, short selling or investing for long term?
- Do you intent to support your current
or future life style by using the dividend income that your
investment will generate?
- Do you want to solely retire on the
dividend income that your investment will generate?
Answering
above questions will make
your investment decisions more informed one reaping your greater
reward.
Happy
Investing,
Keshav
Jha
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