Tips for Investing Wisely
A good example of understanding the above can be in the case of Hershey’s. Just because the chocolate tastes good does not mean that the position of the company is strong. A point should be made that the product of a company does not provide merit to its strength in the index.
Ownership of Shares
Each share represents a small stake in the equity of a company. You can buy large or small lots to match the amount of money you want to invest. A company’s share price can rise or fall as a result of its own performance or market conditions.
Once the shares are brought and transferred in your name your name will be entered in the company’s share register, which will entitle you to receive all the benefits of share ownership including the rights to receive dividends, to vote at the company’s general meetings and to receive the company’s reports.
If you decide to sell your shares you will need to deliver share certificates to the broker in time for the transaction to be completed.
With the introduction of the Central Depository System (CDS), an investor can have shares in paper form or can own shares in an electronic book- entry form at the Central Depository Company (CDC).
Why do Investors Buy Shares?
Studies have shown that over a twenty-year span, investment in shares has provided greater returns than most other forms of savings. Shares can provide you with a regular stream of income through dividends as well as the potential for your investments to grow in value. If the prices of shares go up, you can sell them for more than you paid. This is called capital gain.
What are Dividends?
Dividends are returns paid to shareholders out of the profits of the company. Returns can be in the form of cash or additional shares of the company called bonus shares. Dividends are usually paid once or twice a year depending upon the company’s profit distribution policy.
What is Capital Growth?
This is one of the ways in which shares differ from deposit accounts. The principal amount of money you put in a bank or any fixed income savings scheme always stays the same e.g. if you start with Rs.100,000 you will always have Rs.100,000 (other than any interest earned).changes in value according to the performance of the company. With good management, the value of your investment in shares of a company can grow over time so that your shares are worth more than you paid for them. This is capital growth.
Risks and Rewards
Buying shares can offer advantages over saving in deposit accounts: your investment may increase in value besides paying you dividends. You share the rewards when the company does well and the price of the shares goes up. But if the company performs badly, the share price may go down and the value of your investment will be reduced. Other factors, such as the performance of the stock market as a whole and the general economic climate, may also affect the price of your shares. Investment in shares is therefore investment in ‘risk capital’. The shareholders can be rewarded for taking this risk and the potential return on your money can be higher than that on other investments. You can reduce your risks with careful planning.
Things You Should Know Before You Buy a Stock
Why Stocks are Vital for Superior Growth
Equities are mainly growth investments, and can include things like real estate, art, and gold. However the most popular equity investments that people rely on for growth are stocks. But stocks can also serve purposes other than growth.
In addition to potential capital gains, stocks also have the potential to pay dividends. If you have equity in a business you are an owner, and if your company makes money, you are rewarded with dividend
Financial experts have many opinions on many things, but there is one fact on which they will all agree. You need to have stocks in your portfolio to provide the growth you need to stay ahead and have a secure future over the long-term.
They also agree on the best way to invest in stocks is with a long-term view in mind. Over the long run, equities do go up and have proven to be the most profitable investment by far. But the key phrase here, the vital strategy for success is “over the long run”.
When you hold stocks for the long run you get good days and bad days. If you are a short-term trader, unless you have a crystal ball working for you, you are going to miss most of those good days. The simple secret to success is to stay invested.
How Do you Decide when a Stock is Attractive to Purchase?
There are two general ways of determining a stock's potential as an investment. You can look at the “fundamentals” or you can look at “technical analysis” and of course you can look at both.
Fundamental analysis looks at factors such as earnings, cash flow, debt, strength in its industry, outlook for the industry, general economic factors, interest rates, and so on. If these factors are good, then even if there are short-term setbacks, over the long run, the stock should do well.
Technical analysis looks at factors like volume of trading, cyclical behavior, trends, moving averages and many others.
Some investors use both approaches. They use fundamentals to determine the long-term potential of a company and technical analysis to decide when to buy. For example, you may believe that a certain company has great potential over the long-term and will be worth much more in years to come.
However, it could be that the current market for this company’s product is temporarily weak and that as a result, the stock price could fall. Technical analysis could be helpful in determining how far the price might fall and could provide help in indicating a good time to buy.
How to Become a Shareholder
Shares of a particular company are offered by the following methods.
Initial Public Offering
An initial public offering (IPO) is the sale of equity in a company, generally in the form of shares of common stock. These shares trade on a recognized stock market. A company goes public; to raise capital for project funding, business planning and implementation; for marketing purposes.
A rights issue gives the existing shareholders the right to subscribe for new ordinary shares at an issue price lower than the prevailing market price and at a ratio equivalent to their existing shareholding. Companies carry out a rights issue when they want to raise additional funds to finance their capital requirements.
The Stock Market
Stocks in publicly traded companies are bought and sold at a stock market also known as a stock exchange. This is the most common way of buying and selling shares.
Things you should know about Equities
Stocks and shares are the most volatile asset class in terms of price movements and thus, the most risky. Hence, do not invest directly in the stock market unless you can bear a fall in price without it having any impact on your day-to-day living standard. Remember the saying: “the greater the reward, the higher the risk”.
The aim of investing in stocks and shares is to buy at a low and sell at a high, but knowing when, is the problem. Many investors attempt to time the market: they try to figure out when the market is going up and buy into it before it does, and then figure out when it is going to crash and sell everything just before it does. Unfortunately such spot on accuracy is usually impossible to achieve, so what you can do is try to catch a portion of each big swing. You buy when the upswing has begun, and sell as the downswing starts. But for this to work, you must be able to control your greed, as you do not know exactly when the top or bottom is reached.
The stock market can be said to be driven by two emotions: greed and fear. People get caught up in the boom fever and pay silly prices for unworthy shares - this is greed driving bull markets. In bear markets, people get carried away with the ruling negativity and are overeager to believe the worst rumors - this is fear dominating bear markets. You must step away from the crowd and not let them take over your rational reasoning and action.
How to spot Scams
What is the CDC
Central Depository Company of Pakistan Limited (CDC) started in 1993 to manage and operate the Central Depository System. CDS is an electronic book entry system to record and transfer securities. Electronic book entry means that the securities do not physically change hands and the transfer from one client account to another takes place electronically. CDC is to operate as a central securities depository on behalf of the financial services industry to support an effective capital market system that will attract institutional and retail level investors from Pakistan and abroad. Its basic purpose is to operate and maintain an electronic book entry settlement system for equity, debt and other financial instruments.
Capital Markets prior to CDS
Benefits after CDS was Incorporated
Following are some of the benefits of electronic settlement of securities through CDS:
To track how your stocks are doing, you have to look at stock listings. Stock listings are published in most of the newspaper (e.g. Dawn). The listings look confusing at first, since they look like a mixture of numbers, but can be a very useful tool when tracking your stock's progress. The listings are organized into many columns, including the following information:
Company name: This field is usually abbreviated in the listings, and listed alphabetically.
Symbol: This field is a one to five character symbol used as a sort of nickname for the company.
Volume: The volume is the amount of stocks that were traded the day before.
High, Low and Close: These are the highest and lowest price of the stock the day before, and the closing price for the day before. This is an indicator of how much the price of the stock fluctuated throughout the previous day.
Net change: This is the change of the price of the stock from the previous day. This gives you an idea whether the price is dropping or rising.
In addition to the stock listings, other useful information about companies is available in the Annual Reports that reflects the balance sheet, income statement and cash flows and states the reasons for changes in these financial statements during the year.
Key considerations for investment in equities
It is highly recommended that the investors should have a proper understanding of the commission structure of the brokerage service. The structure varies from broker to broker in most cases. It is advisable that the investor should ask his broker about all the cost associated with stock dealings to arrive at his net profit position
Information Tools Make All the Difference
While you sense the promise and enjoy the excitement of modern technology, like so many others, you probably feel overwhelmed, frustrated, even lost at the prospect of putting your savings online and on the line. Certainly none of the skills crucial to sizing up the market are intuitive; therefore, in order to see what is really going on, and to become a successful investor, you are going to have to learn about the market's state-of-the-art trading techniques and strategies.
Different people trade in different styles. There are long-term investors who buy stocks and hold for a year or two. Mid-term investors may buy and hold stocks from thirty days to six months. Short-term traders trade frequently, on a weekly basis. And finally, day traders buy and sell every day. Now, assuming you make good decisions, the more frequently you trade, the more profit you gain. But what style is right for you? Which stocks should you choose and how long should you hold them? Some investors like companies with strongest earnings. Other players examine company financial statements and balance sheets, picking only those with low debt ratio, high cash flow, and high profit margin.
Finding your style
Your investing style comes from a variety of things: your age, personality, personal experience, and financial circumstances to name a few. For instance, if you are approaching retirement, have financial responsibilities, chances are you may be more risk-averse, or a conservative investor.
On the other hand, if you’re young, earning a high income, have few financial responsibilities, and have seen little in the way of economic hardship, you might be inclined to take more risk.
While there are as many investing styles as there are investors, most people fall more or less into one of three broad categories: conservative, moderate, and aggressive.
Generally, conservative investors feel that safeguarding what they have is their top priority. These investors want to avoid risk particularly the risk of losing any principal even if that means they will have to settle for very modest returns.
Moderate investors want to increase the value of their portfolios while protecting their assets from the risk of major losses. They usually buffer the volatility of growth investments, such as stock, with a substantial portion of their portfolio allocated to produce regular income and preserve principal.
Aggressive investors concentrate on investments that have the potential for significant growth. They are willing to take the risk of losing some of their principal, with the expectation that they will realize greater returns.