Stock investing
Investing in stocks has always involved a high degree of risk. To counter this risk, historically stocks have given its backers the highest return as compared with any other mode of investment. This is a thought provoking revelation, because most people do not invest in stocks because they fear risk. The risk return tangle of financial management suggests that only with higher risk can higher returns be achieved. An investor however, has to come to grips with the level of risk he is comfortable with. For this various probable scenarios could be mapped before the actual stock investing is done and then a conscious decision can be undertaken. He must understand the downside very clearly before embarking on his investment journey.
The origin of stocks was with the joint stock companies that wanted to break away from the shackles of limited amounts of capital and an over dependence on financial institutions such as banks for financing. By inviting the public at large to subscribe to a common stock entrepreneurs could raise huge sums, to finance businesses which they would not have been able to do on their own. Thus the stockholder came to be the owner of the company and thus management was separated from ownership. This was because the large number of stockholders would entrust the stewardship (running) of the company to an appointed few. These would include the promoters (the original entrepreneurs) as well as professionals who were specialists in the fields that they were employed in. Thus to conclude –a stock is a share in the share capital of a company.
Ok so the joint stock company is set up, now what The profits of the entity would be then distributed among all the stockholders in the form of a dividend. Each stockholder would receive an amount equivalent to his stockholding. This model of rewarding stockholders continues today with large profitable companies paying out handsome dividend to investors. Today a stockholder can also expect added benefits such as bonus shares- a method whereby profits are capitalized and distributed in the form of extra stock. They also benefit by getting a larger number of shares when companies go in for stock splits. This is the process when a stock has appreciated to a great extent in the market and then its face value (original value of the share) is changed to a smaller denomination. Thus the stockholder ends up holding larger amounts of stock albeit at a lower face value. The third method of rewarding stockholders today is with an invitation to a rights issue. Here the stockholder gets an exclusive right (but not an obligation) to buy a larger quantity of the companies stock at a price which is usually significantly lower than the market price. This is to reward loyal shareholders in one way and divest capital to already existing stockholders. Entities may follow a combination of any of the above methods the most popular today being rights cum bonus issues. All in all these efforts by profitable companies make stock investing all the more desirable.
When it comes to investing there are 2 key points to be kept in mind. One is when to buy a stock and the second when to sell it. In other words when to enter the market and when to exit it. The market itself is driven on innumerable factors; these are both macro- affect all stocks or sector specific stocks as well as micro factors that affect particular stocks. Here too the general sentiment plays a large part in determining a stocks price. Enthusiasm, rumors and other unquantifiable factors play a large part in stock price determination. An investor must set price targets for himself and depending on the risk he is willing to undertake determine his entry and exit levels.
In the long run a company’s stock price is determined by just one thing- its ability to deliver consistently good results and its willingness to reward its stockholders. Hence an investor can invest in companies that already have a proven record or can do his research and back company’s that have not yet proven themselves but show a great deal of potential.
In the longer run most stocks help people keep ahead of inflation. Hence as a planned savings mode for a future retirement they can provide valuable returns as well as capital appreciation.
The main point you must never forget while stock investing is the caveat that holds good for any other investment as well- buy low and sell high. It may sound elementary but where the stock market is concerned many investors do not set targets for themselves. Thus they blur the points at which they should enter and exit and tend to hold on for the wee bit too long or buy at a time that is not right. Thus investors get into a muddle not being able to divest their investments. Careful evaluation and setting realistic targets is the answer. Targets must be set both at the upper end so as to cash in at a high point as well as at a lower point to make sure that an investor cuts his losses while he still can.
Investing in a diverse bunch of stocks is the answer to tackling the risk of an individual stock. Thus the risk would be spread over a larger number of stocks who would be spread over varied industries. Hence news affecting a single industry would not affect the other stocks.
Another aspect to be kept in mind is the cost of buying the stock. This is usually in the form of brokerage which has to be paid to a stock broker. In today’s world of online stock trading the cost of brokerage has come down significantly. Since most stock data is synchronized on the internet real time price updates have now become a reality. This is very important when investing in stocks as prices fluctuate by the minute. Updates on mobiles via the text message mode help keep an investor updated as to price of his stock.
Another very important aspect to look for when investing in a stock is the volume or quantity of the particular stock being traded on the exchange. It is always better to choose to stock investing that have large volumes traded. This helps facilitate a smooth exit from the stock at a later date. If the stock has limited volumes then finding a buyer at a particular quote may prove to be hard. Stocks with low volumes hamper exit options.
To conclude investing in stock is risky but also gives an investor a shot at higher returns. It is an unsafe investment avenue if blindly entered into; proper research and strategy must be in place before investing in stocks, only then will an investor attain maximum return on investment.
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