Stocks - Some rules

Before we begin into details around stocks, ratios, etc. here are some rules I follow. Thought worthwhile sharing them upfront.

• Even if you get a stock tip from the most reliable resource, do your own research
• If all analyst recommend buying the stock – IGNORE IT!
• If there is a buzz about the stock then STAY AWAY!
• When your mom, dad, MIL, FIL, uncles, cousins, friends, friends of friends talk about stock market – STAY AWAY FROM THE MARKET!
• When no one talks stocks, people advice you it is a dangerous thing, put into it!
• EXTREMELY important - Remember TO SELL!! Selling at the right price is as important as buying
• Be aware of taxation and brokerage costs
• Have a portfolio of not more than 20 stocks and then stick to them for 3 years
• Diversify and keep churning portfolio every 2 months
• Don't track stocks every day (if you are not a trader)
  
• RESEARCH, RESEARCH, RESEARCH

We will discuss some more fundamentals starting the next post. Happy investing!

Equities (Stocks)

Sorry about the break in between. Let us focus on stocks and the stock market for the next few days. First of all let me explain the different approaches that people take towards stocks and stock markets. There are primarily 2 types of people (like us) who invest in the stock markets. I am not here talking of institutions that invest in the stock market. There are people who invest in stocks as something that will help build their wealth. These are typically termed as "investors". A typical horizon is about 3 years. Then there are "traders". People who play on the daily/weekly movement of the stock market to make money. What we are going to talk about is primarily the "investor". I am not really a trader so don't have a lot of comments; i would only comment "stock trading" is a near-full-time profession with lot of attention the market movements. From a financial planning perspective one of the investment areas is stocks for an individual and I assume the person has a day job.

Stock markets when taken with a 3 year horizon provide excellent returns as well as reasonably good stability. While the financial crisis of 2008 has done a lot of harm in terms of confidence in this statement, I still believe in it. Let us start with some basics.

A stock is an investment into a company. You are technically an owner of the company for the percentage of stocks (or shares) that you own. This means that you are part of the company's profits and losses both. A stock (unlike a bond or debenture) is not a loan. It is an ownership of a part of the company. The stocks are traded on stock exchanges and a price mechanism or supply/demand determines the value of the stock. (We will talk in detail about valuation). Stocks can be bought in two ways, primary market - when a company floats an Initial Public offering (IPO) or from the secondary market when the stocks are already listed and different people want to buy/sell the stock. The price fluctuation once listed is caused by demand/supply of the stock (remember this!).

As an exercise I recommend going through one of the stocks listed on the stock exchange and find out these things
- Stock price - high, low, close for a day
- Market Cap
- Face value
- EPS
- P/E

I will explain these in the coming posts...till then keep trying to see for these values for as many stocks as you can...and keep noting them down. Have a good one!