What are stocks?Buying and selling stocks!

Buying and selling stocks can seem to be a easy way to make money, but, when the question is what stock to Buy and Sell you are thinking in the right direction. Picking a stock on instincts is not how professions choose their stocks, but a small research or information based decision that turns into a Buy or Sell Decision is required.

Now lets start from the beginning

What are stocks?

        A "stock" is a ownership of the company.It gives you a claim on the company's assets and income.More the stocks,more the ownership of the company.The earnings of the company are given to you from time to time and they are called "dividends". A stock is authorized by a "stock certificate" which is a piece of paper representing your proof of ownership.However,nowadays you could have a "demat" account because buying and selling stocks is all done electronically.

What are the benefits of having stocks?

       Being a shareholder in a company gives you "one vote per share" authority i.e., you can elect the board of directors in an annual meeting of the company.

Why do companies issue stocks?

             Any company at some point needs to "raise money". To do this, companies can either borrow it from somebody or raise it by selling a part of the company, which is known as issuing stocks.All that the shareholders get in return for their money is the hope that the shares will someday be worth more than what they paid for them.

Why do the prices of stocks change everyday?

           Stock prices are always fluctuating.the prices demand on the market forces i.e.,demand and supply.If more people wants to buy a stock(demand) than sell it(supply) then the prices of the stocks go up and vice verse (Basics of economics).

3 Important things a new investor should remember

• Do not ever consider the "tips" offered by others like "hot stocks" and so on.
• Always think twice before investing in a particular stock by examining the company,its current status,etc.,
• Only invest the money which you can afford to lose!(considering the worst case scenario)

Which stocks to buy?

To decide which stocks to buy you have to do 2 basic analysis

1. Fundamental Analysis
2. Technical Analysis

Fundamental analysis is looking at the actual company and trying to figure out what the company price is going to be like in the future.

Technical analysis is looking at the stocks charts,people's buying behavior etc., and predicting the stock prices in future.

Nightmares that will eat up your money

       There are generally 3 problems that cause a stock price to decrease

1. Inflation
2. brokerage
3. taxation

Inflation

     Inflation is a concept of increase in prices of commodities and goods over the course of time.It reduces the worth of money.

     For example,A movie ticket was for 50 paise in my dad’s time. Now it is worth Rs.50. My dads first salary for the month was Rs.400 and over he years it has now become Rs.75,000. This is what inflation is, the price of everything goes up. Because the price goes up, the salaries go up. The moral of the story is that, the worth of the 50paise reduced dramatically. 50paise could buy a whole lot when my dad was a kid. Now, 50paise can buy nothing.

     So ALWAYS INVEST MONEY and when investing, you have to make sure that the rate of return on your investment is higher than the rate of inflation.

Brokerage

     Note that all your transactions in the stock market are done through "stock brokers".A stockbroker earns a commission on whatever transaction you make. For example,you make a transaction of Rs.2000, and the stockbroker charges you a 3% commission, then you have to pay the stockbroker Rs.60 (3% of Rs.2000) for the transaction. So your total investment in the transaction in “not Rs.2000”. The total investment in the transaction is Rs.2060/-

    

So after sometime, if the price of the stocks you invested in goes up to Rs.2060 then you have not made any money because the total amount you invested was Rs.2060/-

What is more, even when you sell the stocks, you have to pay the broker brokerage of 3%. This means that, when you sell the stocks for Rs.2060, you have to pay the broker Rs.61.6 so the profit of Rs.60 you made on the transaction is gone, in fact you actually make a loss of Rs.1.6!!

So in effect even though you made a profit of Rs.60 because your stock price went up, you have actually made a loss. 

Taxation

    There is a “short term capital gain tax” in our country. For a short term (less than one year) you have to pay tax on any capital gain you make though the stock market trading. How much % tax you have to pay, depends on which "tax bracket" you fall in.

   Just to give you an idea. If I make Rs.100 though a transaction in the stock market, since I fall in the 33% tax bracket. It have to pay Rs.33 of that to the government!!

VERDICT

    

   So these are the things that eat up your money at stocks and this is your hard earned money so be advised before investing.This is pretty much all of the basics of stock market and there are still lots more to learn.

   Hope this article was helpful.If you have any queries please mention it in the comments below and ill be pleased to answer them.

Regards,

KiShore.