what is Stock Market?

A long  time ago, humans ran businesses with just their money. The businesses  they ran were small and they grew the businesses only with their own  profits. However, not all businesses can be built with your own money.  What if you wanted to build a new factory that costs more than a million dollars? Banks won't lend money for young companies and your friends won't have that much.

In the 15th-16th century as the Europeans started exploring Asia and Americas, the big explorers felt they needed a lot of money and their kings were not providing them anymore. The wealthy guys demanded a lot of interest. Thus, they felt they need to raise money from a bunch of common people. Thus, in 1602, the Dutch East Indian company became the first company to issue shares of its company in the Amsterdam Stock Exchange and get traded on a continuous basis.

What is a Stock? 

Stocks  in a company provide you a share of the company's future profits in  return for the capital invested. For instance, if you buy 1 stock of  Apple now, you will be assured one-billionth of  Apple's profits in the  future (as there are almost a billion such stocks that Apple has issued  now).

Listing: In  a stock market, 1000s of companies are listed and these companies  (called public companies - as they have given out their shares to common  public) pay a fee to the exchanges, along with a promise to provide all  important info to the markets. In return they get an opportunity to put  their company in the stock market's board & have the ability to get  money from people visiting the market. The first time a company's stock  appears on the stock market's board is called an IPO (Initial Public Offer).

Brokers: Conceptually,  a stock exchange is similar to eBay. These guys allow companies to  be listed and connect the buyers & sellers. Since millions of people  trade in the market and it is practically impossible for these  exchanges to deal with all the individuals, they have assigned brokers who act between the exchanges and the individuals.

DIFFERENCES BETWEEN INTRADAY TRADING AND DELIVERY TRADING. WHICH ONE’S BETTER FOR YOU?

If you invest in share markets, then you would have most likely heard of Warren Buffett, the greatest investor of all time. Some of the shares in Warren Buffett's portfolio were picked up almost 20-25 years ago. But frankly speaking, most of us are not like Warren Buffett and holding shares for years at a stretch is not everyone’s cup of tea.

For those who are not interested in long term investing or more specifically delivery trading, there is an alternative in the form of intra-day trading waiting for them. And this is a place where thousands of small investors try to make a fortune every day, by tracking minute by minute change in share prices. 

The Difference

You can trade in two different ways in share markets. You can either do intraday trading or you can opt for delivery based trading (investment). Intraday trading is typically completed within a day – this means that you have to sell the shares that you have purchased on that day before the closing of markets. Even if you don’t sell the shares by yourself, they are automatically squared off before the closing. On the other hand, in delivery based investments, you are not required to buy and sell shares within a day and you can hold them for as long as you want.

Advantages & Disadvantages

There are quite a few advantages of Intraday Trading, the biggest one being that you are allowed to buy shares without paying the full price of the shares (Paying only the margin money). The market makers allow you pay only a part of the price to hold the shares. So, you can gain more by investing less. But this means that your losses would be higher as well. 

Intraday trading also allows you to short sell the shares – selling shares even before buying them (but buying before market closes). This is one benefit that can give you profit even when the price of the share is sure to fall. 

The brokerage for intraday trading is always lower than that for delivery trading.

One of the biggest disadvantages of intraday trading is the time frame. No matter how confident you are, you have to sell the shares within a day. So, if the share loses price, you are sure to lose money too. You also do not get the benefits of long term investment like dividends, bonuses etc. in intraday trading. Another negative aspect of intraday trading is that it can become quite stressful as you need to monitor the markets continuously. And with daily profits and losses, it can take a toll on a trader’s mental well being.

Choosing between Intraday & Delivery Trading

Unfortunately, the lure of quick money sucks in investors who should ideally stay away from intraday trading. Intraday traders buy shares for just few minutes or hours whereas delivery traders might buy for months or years. 

Now if you, as an intraday trader can judge the mood of share prices at regular, small intervals, only then should you think of intraday trading. You must be good at technical analysis. There are many technical tools that also help in predicting short term share price movements. Fundamentals play smaller role in intraday trading. 

But if you think long term investing is better suited for you and you pick shares on the basis of evaluating a company’s intrinsic value, etc., then delivery based trading is what you should be looking at.

WHAT SHOULD I KNOW BEFORE INVESTING IN STOCKS?

Investing in stocks is an interesting decision that you might take at some point of your work life. Though it sports a promising outcome, stock investment includes its own dangers which can be easily tracked and solved. But, it is to be remembered that you have full knowledge on what you are investing and how much you are putting in. Being a 19 year old, I am already excited to start investing and buying shares from companies, so I am pretty sure investing in stocks is everyone’s dream of the day. In order to actually give a nod and start the whole investing process, you need to at least keep in mind the following criteria,

1. Stocks represent actual money. Always be sure of the company that you are going to invest in. When you buy some share of stock, you are buying a small part of the firm, so it is of utmost priority that you choose the correct firm.

2. It is recommended that you choose already booming companies while purchasing shares of stock so that you have minimal guarantee that you are not going to lose your money even though the market starts falling down.

3. It is a well known fact that the best time to sell your shares is during the month of Christmas so that you make the best profits off your investments. Once you sell your shares back, you are always free to invest your extra income in another trustworthy firm of your choice.

4. Before actually buying your desired shares, you could make a background check on the company and look into its present stock rates, its per-capita, turn-over range for the year and the profits on each share of stock. Basically, you have to go through the company’s annual reports for a complete picture.

5.  Constant surveillance of the ups and downs in the daily census is considered a good habit if you are truly into investing in stock.

6. Some companies/small scale business groups that are new at the market promise you with huge profits at less investment rates. It seems a fair deal but it is quite risky that you give a green signal to such offers in the investment sector.

This particular mode of investment is a really fragile move that you need to take choosing the best of choices available. Contacting a professional stock broker before you actually sign the deal is considered to be the best option that you could choose while diving into the world of investments. It is also important that you do not discourage yourself when your first investment was not as fruitful as you expected it to be. Just say to yourself, ‘better days are just around the corner’.

EFFECTS OF MERGERS AND ACQUISITIONS ON STOCK PRICES

Stock prices of listed businesses are highly sensitive to changes in the equity market and this aspect can be attributed to economic and political factors as well as health of an organization in focus. Economic and political factors pertain to monetary & fiscal policy, exchange rates and governance while the health of an organization is gauged by the overall performance of the company (payment of dividends, mergers and acquisition, restructuring-layoffs etc).Thus, investors are always advised to adopt a holistic research approach while investing in equities.

Understanding mergers and acquisitions

“Mergers and Acquisitions” (M & A) concept is one of the key business decisions that have profound effect on stock prices. In simple terms, a merger is a process when two independent firms or entities become one i.e. process of amalgamation. Acquisition, on the other hand, can be termed as buying out of one company by another. Here, the acquirer attains full management control of the other entity. 

Stock prices get affected in two ways when an acquisition takes place, one is the price of the acquirer and other is that of the organization which is being acquired. Usually, the latter is recipient of better advantages. 

A popular example of acquisition is that of European steelmaker, Corus by TATA steel while that of a merger is when Godrej Consumer Products merged with the erstwhile Godrej Sara Lee. 

As a word of caution, all mergers & acquisition do not necessary have a positive outcome. For instance, the buyout deal between Time Warner & AOL, touted to be the most promising one looking at market capitalization of the parties involved, ended on a sour note with both entities breaking the contract (de-merger). The result was the crash in AOL stock prices.

Mergers & Acquisitions can take place for the following reasons: 

• Increase the economies of scale.
• Widen the portfolio and the demographical reach.
• Achieve domination in the market i.e. two relatively smaller companies can merge and take on the market leader.
• Tax purposes: They receive tax sops but this criterion is pretty implicit.

So how do M&A’s affect stock prices?

Here are few pointers which will provide a brief snapshot on the affects that Mergers & Acquisitions have on stock prices.

1. For an acquirer, the impact on stock prices depends on the target being acquired. Accordingly, if the market sentiment is showing positive response and believes that this M&A will lead to an optimistic outcome (growth prospects & profitability), the shares will appreciate accordingly. Conversely, a negative sentiment or a neutral attitude will either reduce the stock price or would not show much variation in the current value.

Elaborating on the example given before, when AOL announced its intention to buy Time Warner, the former’s share soared 800-fold. However, due to certain factors, the deal was broken and AOL was then estimated to be worth 3.4 billion $ (a fraction of what it used to be in its heydays). 

In a separate instance, at the time of being acquired by Google in 2011, Motorola Mobility shareholders received $40 a share in cash, an enticing 63% more than the closing price of the same share on August 12 in New York Stock Exchange. 

And in case an acquisition is made by liquidating the acquirer’s stock, it might see decrease in the pricing since the shares are floated on large scale in the public market but the same can be reduced, if the company can convince the existing share holders to buy back at the same prices.

2. For an entity being acquired, usually the share prices see an increase as the acquirer will be buying out the stocks. Also, if the deal is seen to be beneficial in long –term, there would be an increased demand for its stocks, thereby increasing the unit price.

HOW TO EVALUATE A COMPANY WHEN BUYING ITS STOCK?

Owning a company’s stocks represents ownership in the business – be it customers, employees, assets, suppliers, etc. A stock is not just a ticker trading in markets and behind every stock, there is an actual business.

So when you want to find a good stock worth investing in, it actually means trying to find out a good business that is priced at a reasonable valuation.

A company’s stock can be evaluated in many ways. Here's more on how to choose a stock:

1) Buy What You Know

Choose an industry or a company that you are familiar with. You will never give money to a stranger unless you are sure that it will be returned. Right? The same principle applies to stock investing too. Just ask yourself – “Can I really understand this business?” For example - I know nothing of the pharmaceutical business as I’m not a doctor – so I will be better off buying stocks of companies in that sector.

2) Valuation

Investment professionals often look for stocks that are "cheap" or "undervalued." And the reason for a stock being undervalued is down to the fact that investors are paying a relatively low price for each rupee the company earns. This is measured by the stock's price-to-earnings ratio, or P/E. Very roughly speaking, a P/E below about 15 is considered cheap, and a P/E above 20 is considered expensive. 

But there's more to it than just that:

Know what kind of stock you're talking about. A company that's expected to grow rapidly will be more expensive than an established company that's growing more slowly. Compare a company's P/E to other companies in the same industry to see if it's cheaper or more expensive than its peers.

Cheap isn't always good, and expensive isn't always bad. Sometimes a stock is cheap because its business is growing less or actually slowing down. And sometimes a company’s stock is expensive because it's widely expected to grow rapidly in terms of earnings in the next few years.

3) Financial Health

All public companies have to release quarterly and annual reports. Don't just focus on the most recent report. What you're really looking for is a consistent history of profitability and financial health, not just one good quarter.

Generally, stock prices increase when companies are making more money, which usually starts with growing revenue. So look for companies which have a history of consistently growing revenues.

The difference between revenue and expenses is a company's profit margin. A company that's growing revenue while controlling costs will also have expanding margins. A company earning higher margins is a much better investment than the one which earns lower margins.

Know how much debt the company has. Generally speaking, the share price of a company with more debt is likely to be more volatile because more of the company's income has to be directed towards servicing interest and debt payments.

4) Dividends

A dividend is a cash payout to stock investors. And it is not only a source of regular income, it's a sign of a company in good financial health. But remember that not every company pays a dividend. In fact, many fast-growing companies prefer to reinvest their cash rather than pay a dividend. Large, steadier companies are more likely to pay a dividend than are their smaller, more volatile counterparts.

When picking stocks, you should keep in mind that you are becoming part owner of the company. And keeping aside short term market movements, your investment will eventually depend on actual health of the business. So pick stocks of only those companies which are operating in simple, predictable, growing and high margin businesses.

ADVANTAGES AND DISADVANTAGES OF INVESTING IN COMMERCIAL REAL ESTATE

You were always interested to have income generating property in your investment portfolio to diversify your funds.

It is a wise thought but a word of caution to all those investors!

Where there is money involved with lucrative returns, there is bound to be risks occurring. Thus, before investing, take time and analyze the advantages as well as disadvantages of the proposal to make an informed decision.

There are two ways of investing in commercial real estate. One is through direct investment and the other through REITs.

Let us now analyze the benefits versus risks of each plan independently which will help you in the decision making process.

Direct ownership. An individual can come into possession of the said property by purchasing directly from the property developer or through a real estate broker/agent.

Pros.

• Regular income source in addition to the primary revenue inflows.
• It requires limited operational management and monitoring unlike other businesses.
• Useful asset which can be used for taking loans or as collateral when funds are required.
• It is one of the few assets which appreciates with time, if the market is favorable. Also, an investor can reap more than 100 % of the initial investment which many financial products in the market cannot offer.

Cons.

• Huge investments which may run into crores depending on the location.
• Properties are ridden with litigation. Hence, the buyer has to do extensive research before buying.
• Property as well as the income from the property is taxable and it is on higher side when compared to other available instruments in the market.

The property market is subject to fluctuations. Hence, the income generated may vary with the current estimated value.

REITs. If you do not have the required capital or risk appetite (as property prices are prone to fluctuations) to directly invest in commercial real estate, do not fret. Invest through REITs!

REITs or “Real Estate Investment Trust” is an enterprise that owns or finances income producing properties and by buying their shares, one can become a part owner but without the risk or huge expense involved. REIT’s invest in income generating properties and the revenue from the same is distributed to individual share holders as returns or dividends. Usually, REITs specialize in only one category be it office spaces, warehouses, shopping malls, residential units etc.

REIT’s investment pattern in property is of three types: -

1. Equity REIT’s: The concerned enterprise fully owns the revenue generating property. One distinct difference between Equity REITs and real estate entity is that the former should purchase and develop its properties principally to drive income but the latter can sell it and is not liable for continual engagement with the owners.

2. Mortgage REITs: These enterprises extend loans to real estate firms or property management group, directly or indirectly. The returns churned out from the same are passed onto its individual shareholders.

3. Hybrid REITs: As the nomenclature goes, it is a combination of both – Equity and Mortgage. The percentage in each category depends on the risk appetite of the enterprise.

Pros:

• Regular income source in addition to primary revenue inflows.
• The investor enjoys the flexibility to be part owner of desired real estate project without massive investments i.e. investors may not be able to afford direct investment into lucrative and up market properties.
• Investment in direct property cannot be easily liquidated, if required. This is not the case if investment in property is done through REITs. In case of the latter, if funds are required on a short notice, shares can be traded and required amount realized.
• Minimal or no requirement of operational management.
• Transparency and flexibility are among the most critical benefits that an investor receives in REITs. Transparency is possible since the investment happens through trading of shares in an open market which is regulated by a government body. Flexibility is offered in terms of buying and selling the shares.

Cons:

• Since the returns are market linked, there is always bound to be risk on the level of proceeds.
• If the said enterprise is declared bankrupt or forecloses, the entire risk of losing the money will be the responsibility of the investor.

TAKE SMALL STEPS TODAY

We are all aware of the artistic genius that was Michelangelo and his most beautiful piece of work: the Sistine chapel in Rome.

Before you think there’s no link of him to money, let me assure you there isn't; but for this beautiful quote of his that cannot emphasise more the value of time.

I've often heard friends /clients say " I'll start saving once I get married, I'll start saving once I'm 30, I'll start saving once the sun rises from the west " etc.. The excuses are many.

The only thing that one is hence losing is time.

Let me explain it in a crude manner :

1. Monthly savings: let's say I think 3000 is too small an amount to save every month and I shall wait once I have a lakh or so to start saving. In a perfectly sensible scenario I would start saving 3000 rs a month which translates to 36,000 annually and with a small interest component could mean a saving of 40,000 a year. Yes, for a large part of people 3000 rupees means one weekend exp/ or one trip to a High street fashion store. The perfect Time to start monthly savings is now ! This has nothing to do with age / timing etc. the perfect time to start is today, no amount is too small!

2. Cost of insurance: the cost of a term insurance for a perfectly healthy male of 27 for a sum assured of 1cr is around 13,000 ( offline insurance ) , while this person chooses to wait and takes an insurance at 31 once he has fixed that date for his life to change the cost of the same insurance is around 20,000 rupees. In the scenario that he got a high BP/ diabetes (yes, these days you get at even such an early age) in this period of 4 years he will be rated up on the policy and his premium increased.

It is imperative to start saving when you are young so as to insure yourself from all future risks. It Is a very simple and logical way to progress and I've tried to put it very simply . It is small changes that we do in time that make sure we are well protected .