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This is a fictionalized story. The events, characters, and situations are fictitious but based on real experience. Any similarities or resemblances to actual people or person, living or dead is purely coincidental
Sometime in June 2007, I was working at Google! Back when from campus placements. I was 26 yrs old, fresh into a dream job with an obvious promise of “making me well settled.” I had some weird notions about “Getting Very Rich Very Fast” back then. I was good with numbers, knew about stock markets basics and considered myself to be “analytical”, so I thought I am smart, very disciplined internally and can dominate the stock market.
Now, there was one more guy in our new joiners group who was equally enthusiastic about the stock market (that guy is now an IAS officer) and just like a smoker finds another smoker in a big group, we found each other and became buddies. We did the basics, and opened a trading and demat account.
While we were ready to start our journey in stock markets. We got to know that there is something called Options (derivatives) apart from regular stocks. We got to know that it is a high risk/return thing, and like any greedy person, we didn’t focus too much on the “high risk” part, the only thing we could read was the “high return” part
Learning about Options trading opened up to a whole new world for us. We learned that options trading is an amazing leverage tool which was very fascinating. I learned about technical analysis also and used all my work time in downloading and learning about this (oh it was so amazingly easy!)
As we went head over heels, our greed went to the next level and our profit margin went really REALLY high (but we didn’t focus too much on the risk factor, in fact, we were not even clear on where we are entering into and how risky it can turn out to be).
So we're all set with high energy but could not take any action because our trading account was still not active at that time and we were waiting for it.
In the beginning, I made Rs 2,500 profit, a 24% profit during just my LUNCHTIME! I was already planning to leave my job!
My overconfidence was rising way above the sky, and then there was only one way for me to go: DOWN!
I realized that “knowledge” is just a secondary element to trade successfully in stock markets. Almost all the good traders around the world agree that “knowledge” does not contribute more than 10-15% to being a successful trader. It’s an important thing, but certainly not the holy grail
I am not saying that one should not focus on the “knowledge” part. Too much knowledge leads to speculation, and that’s where I went horribly wrong. Always make sure to keep your Research Strong, and not to go with instinct alone.
What I have seen is that all the new traders somewhere want to challenge the markets and want to predict when markets will fall and when they will rise. They all want to time the market (and I did that all the time!)
This is the essence of where most of the failed traders are stuck. If markets are rising, somewhere inside me, I wanted to catch the top and wanted to prove as if I “almost” know that now markets will fall OR if markets were going down.
So just make sure that you never go against the flow in general. Try to identify the overall trend (upside, downside) and then make sure whatever is your trading style, be with the flow itself.
Today I have shared the mistakes I did when I traded OPTIONS and I hope you will learn from my mistakes. But this can just be a starting point only, you will only learn when you get on the ground and do the real trading. Till then it’s just a practice no matter what you do.
In 1914, the company was founded by a man, who was having great visionary to build an empire named Parmanand Deepchand Hinduja, established a family business that spread rapidly throughout the world. In 1919, Company’s started its International operation in Iran, but after the Islamic Revolution, it was moved to Europe.
Group Chairman Mr. Srichand P. Hinduja along with his brothers Gopichand, Prakash, and Ashok Formulated and Implemented a strategy for the diversified growth of the group and transformed it into an international level.
Presently companies are operating in 38+ countries with 150,000+ team members. Today Hinduja Group has become one of the largest diversified groups not only in India but also in the world.
Groups are operating in Banking & Finance, Automotive, Healthcare, IT, Media, Power, Real-estate, Oil, and so on.
IndusInd Bank – It is a private sector bank in India and it was started in 1994. It is the only commercial bank in India to receive ISO-9001:2000 Certification for its branches network. It has 2000+ branches & 2700+ ATMs, spread across 750+ locations in India.
Hinduja Bank (Switzerland) Ltd – It was founded in 1978 and is formerly known as Amas Bank. In 1994 it was regulated by the Swiss Bank. Its headquarters is in Geneva.
Hinduja Leyland Finance Ltd. – It was incorporated in November 2008. It is engaged in a wide range of vehicle finance (Like MHCVs, LCVs, SCVs, CAR, Three Wheelers, Two Wheelers).
Hinduja Housing Finance – It was incorporated in April 2015. It offers a wide range of Home Loans. It is a subsidiary of Hinduja Leyland Finance, which is one of the leading NBFCs in vehicle finance.
Ashok Leyland - It was incorporated in 1948 as named Ashok Motors & in 1955 it becomes Ashok Leyland. It’s headquartered in Chennai. It is the 2nd largest manufacturer of commercial vehicles in India
Hinduja Foundries – It is a division of Ashok Leyland. It is India’s largest foundry business group.
Optare – It is an English bus manufacturer based in Sherburn-in-Elmet, North Yorkshire. It is a subsidiary of the Indian company Ashok Leyland.
Gulf Oil Lubricants India Ltd – It is the Indian Lubricants Industry. Gulf Oil International (GOI), the parent of GOLIL, owns the Gulf brand globally (except USA, Spain & Portugal).
Hinduja Realty Ventures Ltd – It Aggregate Hinduja Group's real estate assets under Hinduja Realty Ventures Limited (HRVL) - the flagship real estate development arm of the Group.
Hinduja National Power Corporation Ltd – It is a thermal power plant (coal-based) located in Palavalasa village in the Visakhapatnam district, Andhra Pradesh.
Hinduja Renewables Energy Private Ltd. – It is an independent, future-facing power producer with a vision to grow through both organic and inorganic means in renewable energy.
Hinduja Global Solutions Ltd – It is a service provider headquartered in Bangalore, India. It is a business process management organization. It operates globally with 69 Customers and around 45000+ employees across the world.
Cyqurex Systems Private Limited – It is a joint venture between Hinduja Group and NJK Holding a cybersecurity firm headquartered in London. It is basically engaged with cybersecurity solutions to address the challenges that enterprises face today.
INE and Indigital – It is one of India's largest integrated media companies running one of the largest digital cable TV platforms in the country under the brand "INDigital".
P D Hinduja Hospital – It was established in the 1950s by the late Shri P.D. Hinduja with a vision to deliver Quality Health Services.
Hinduja Healthcare Limited – It is Mumbai based Multi-specialty Hospital. It offers advanced medical facilities.
The British Metal Corporation (India) Pvt. Ltd – It is the Joint Venture between Hinduja Group & Amalgamated Metal Corporation Group (UK). It was established before India’s Independence and is engaged in the trade of materials.
Google, Facebook, Amazon, Apple Netflix, etc have been household names in our homes and our lives, and it goes without saying that these will continue to become more prevalent and relevant in the years to come. But…why haven’t we been able to be a part of this bull ride? Just because these are international stock?
For a long time, the Fortune 500 and the S&P 500 have remained the domain of the rich and investments in the US stock market remained elusive to us; not anymore! With Swastika, you can make your investment portfolio diversified and invest in the US stock market with the simple click of a button.
With swastika, it is now possible to invest in companies you know and love, from all around the world.
With Swastika, you can invest in the US stock market without any minimum invest, absolutely at zero minimum balance!
You can invest in multiple economies without any restrictions and lower your trading and investment risk. With Swastika, you get a personalized team of experts.
Go International and invest in futuristic global companies listed on US stock markets with Swastika. Grow your wealth with investments in the fastest growing companies in the US like never before!
On our online trading platform, you can invest in either full or fractional shares. If the investment is in full shares, then our broker partner, Drivewealth, will route the orders to market centres on an agency basis. If the investment is in fractional shares, our broker partner, Drivewealth, will satisfy the order form on its own account on a principal basis, at the National Best Bid or Offer. NBBO means that the broker partner cannot add a margin to the price. Therefore, any order for both full or fractional shares will be executed via both methods, part as an agent and part as a principle. Under the RBI’s Liberalised Remittance Scheme guidelines (LRS). Reserve Bank of India (RBI) has laid out a set of policies that governs the maximum amount and purposes of remittance. Under LRS, an Indian Resident can annually send or invest up to USD 250000 abroad without seeking approval from RBI. This scheme has simplified it for Indian residents to study abroad, travel and make investments in other countries. For latest up to date information, refer RBI’s website and also see article 6(iii) for specific LRS regulations regarding investment in equity. If you want to buy $50 dollar worth of a share of Apple or Microsoft, you can! WE have democratized access to international investing with fractional investments.
Swastika has partnered with a US brokerage - DriveWealth. The US brokerage ecosystem recommends that every investor account should have insurance. DriveWealth is a member of Securities Investor Protection Corporation (SIPC) which currently ensures your account against broker default by up to $500,000 of which $250,000 may be in cash.*
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Options Trading is becoming insanely popular among investors as it allows them to hedge risk while earning a good income. Also, options trading allows many traders to hedge risks, speculate high yield stocks, and earn income.
There are different strategies through which investors can diversify their portfolios and earn high returns. With options trading, you can buy or sell an asset at a set price at a certain date.
An option trader needs to determine the correct underlying asset as the value of options stock gets derived from the underlying asset. Hence to increase trading options, traders need to focus on selecting the right underlying stocks to trade.
As you add some options to your portfolio, you will get to realize that the method of buying and selling is really helpful. This is because options stocks add more leverage and protection as well as yield high earnings.
Apart from investing goals, options contracts help you to achieve what you are trying to do. For instance, you may add option contracts to hedge against stocks that are currently running in a downturn thus helps to lessen the losses.
It is important to do some research to find the best stocks for options trading. Do research related to review earning reports, monitor upcoming events, industry-related search, and check how these events impact the stock market.
Check out the management team of a company, go through their website and press releases, check out the products and services they provide and check if they provide any proven record of success or not.
Before selecting any stocks in options trading, make sure that the stocks you choose are highly liquid. This is because liquidity allows you to enter the trade and exit from the trade more easily that too without paying heavy slippages.
The most liquid stocks with greater volumes indicate that the trading volume of a stock is ongoing and cannot be affected by any upcoming event. Many investors often get confused with the liquidity of stocks and the liquidity of their options. However, the case is somewhat different from what you think. If a stock is liquid that doesn't mean that its options are also liquid.
Volatile options trading provides greater returns irrespective of underlying stocks moves up or down. Implied volatility is the most important factor to determine the options price as it tells you whether a market is expecting to move or not.
High volatility always comes with high premiums that help to determine that the volatility will not get increased which causes the option to get exercised.
In contrast to this, lower implied volatility means benefits to the buyer of the option as it gives cheaper priced options.
For greater gains, traders can also compare a stock’s historical volatility with its implied volatility. For options traders, it is crucial to keep an eye on upcoming events that could affect the implied volatility of an underlying asset.
Traders who are interested in options trading, need to pay a little attention to stock-specific events. Economic data release, earning reports, election results, and product launches have a significant impact on stock prices.
Here, traders need to predict when a stock is likely to have a big price movement. Carefully notice that movement, get into it, and exit before the movement is over and starts to reverse.
It is feasible to create a watchlist of stocks with whom you are more familiar with the movements and behavior of stocks. For beginners, it is suggested to stick to those stocks on which you made correct predictions in the past. This is recommended for those, who are not much experienced.
If you are an options trader, you need to determine what your trading objectives are. Knowing investing objectives help traders to get a clear idea of what are the goals that help them to choose the best investment strategies.
Needless to say, options trading helps traders to hedge risks when the stock market goes down. However, there are multiple points you need to consider while investing in the stock market. Traders need to do a bit of research, review historical data and charts to identify trends before investing in options trading.
“FII” is commonly used amongst investors in the stock market. This is because FII is such entities that pool large amounts of money and invest in financial securities such as real estates, investment assets and the stock market and more. As they invest the bulk of their money in the stock market, the inflow and outflow of money highly affect the stock market movement significantly. There are many headlines you see in the news when the stock market drops. For instance, Sensex falls 500 points on FII selling. Such incidents happen when FIIs pull their money from various investment sectors. Nowadays Indian stock market has become the best destination for FII. Foreign institutional investors poured more money into the stock market than other investment sectors. They have to buy and selling powers in their hands and hence they can change the course of the market within minutes. In India, FII are bound to not invest in equity issued by Asset Reconstruction Company. Also, they are not allowed to invest in any organization who is involved in chit fund, Nidhi company, agricultural activities and real estate business. Before we take a dig deep into getting benefits from FIIs, let's understand about FII and how do they affect the Indian stock market:FII are those institutional investors who invest in a country outside on one where the organizations are based. For example, US Mutual funds invest in the Indian stock market. FII pools large amounts of money and invests in those securities that highly impact the stock market movements.
Like any other investors, FIIs look for the investment opportunities which provide them better return against their investments. Keeping in mind, they primarily focus on emerging markets like India, China, Brazil and more. The main reason behind the selection of emerging countries is that these countries have been growing at a greater pace as compared to other developed countries and offer better investment opportunities for FII. India’s high GDP rate over the few years forced FIIs to invest in Indian stock market. Apart from growth, there are other important parameters such as liquidity, political influence and geographical conditions. Although any stock market easily welcomes FIIs to invest their money, however, they have the potential to create chaos in the stock market.
FIIs are good for developing economies such as India as FII investment strengthens the global confidence in an economy and stock market. For countries like India, the investment amount brought in by foreign institutions generally adds to foreign reserves which can be used by the government to import oil, machinery and more.FII investment in a country boosts the economy of that country which in turn makes FDI follow suit. With the significant increase of foreign investments in any country makes FDI take part in management such as joint venture, merger, investments in technology-oriented products and more. FII always purchases stocks by doing fundamental analysis of each stock such as evaluation, research of those stocks that lead to increased demand on companies to become transparent to retail investors. Secondly, FII cash inflow brings a large capital which is the main cause of the opening of the stock market. Needless to say, FIIs invest huge foreign capital in the Indian stock market which strengthens the confidence of local investors of Indian stock market. Also, FIIs cash inflow not only uplifts the stock price movements in financial markets but also improves the alignment of asset prices to fundamentals. Another crucial benefit of FIIs is that they increase the competition and efficiency of financial markets.
FII holding percentage is considered as an important factor while analyzing a stock. When a percentage of holding increases in stocks, the stock price goes high or vice versa. If an FII invests in any company, the growth of the company automatically increases. A financially stable company that has a stable FII percentage of holdings would be considered as a safer investment option. Hence, when FII removes its part of stocks from a company, the price of stock actually falls.
FIIs hold a great contribution to the Indian stock market, however, their investment percentage is fluctuating from time to time. Besides, FIIs investment in the Indian stock market is considered as a major factor that influences the stock price of a company. Hence, FIIs are a crucial economic indicator that helps investors to analyze a single stock and the whole stock market in an effective way.
There is no set-in-stone rule, but generally speaking, as you get older and closer to retirement, you should reduce your exposure to stocks in order to preserve your capital. As a rule of thumb, take your age and subtract it from 110 to find the percentage of your portfolio that should be invested in stocks, and adjust this up or down based on your particular appetite for risk.
An index fund allows you to invest in many stocks by purchasing one investment. For example, an index fund gives you exposure to all 500 stocks in that index.
Index funds can be an excellent tool to diversify your portfolio and reduce your risk. After all, if your money is spread across hundreds of stocks and one crashes, the impact on your overall portfolio is minimal.
If you only want to buy individual stocks, I suggest buying at least 15 different stocks across several different industries in order to properly diversify your portfolio. However, this may not be practical when you're just starting out.
An alternative to buying lots of individual stocks is to invest the bulk of your money in index funds and buy one or two stocks with the rest. This takes most of the guesswork out of investing, while still allowing you to get some experience with evaluating stocks.
Many stocks choose to distribute their profits to shareholders in the form of dividends, while others choose to use their profits to reinvest in the growth of the company. In general (but not always), dividend stocks tend to be less volatile and more defensive than non-dividend stocks. It's important to note that just because a company pays a high dividend doesn't necessarily mean that it's a better investment.
Over the past 80 years, dividends have been responsible for 44% of the total return of the S&P 500 index, and dividend reinvestment can be an extremely powerful tool for creating long-term wealth.
I'd advise new investors to take a long-term view of the markets. In any given year, the market could gain or lose a substantial portion of its value. However, over long periods of time, the markets are surprisingly consistent. Over any recent 25-year period, the S&P 500 produced average annual total returns of at least 9.28%, so it's fair to expect this level of performance over the long run -- even though over any shorter stretch it can vary significantly.
One investment rule I never break is that if I can't clearly explain what a company does in a sentence or two, I won't invest in it. For example, I really don't understand most biotech companies (nor have I really tried to), so I'm not going to invest in their stocks. On the other hand, the business models of my largest stock holdings such as Realty Income, FedEx, and Google are rather straightforward. It's important to only invest in businesses that are easy for you to understand, especially while you're just starting out. Watch out for red flags.
There are several red flags to watch for when choosing stocks. Just to name a few, beginners should avoid the following types of stocks:
Before you buy a stock, it helps to know how volatile you can expect it to be, which you can determine by looking at its beta (included in virtually any stock quote). A stock's beta essentially compares its volatility to that of the overall S&P 500 index. If the beta is less than one, the stock can be expected to react less to market swings, and if it's greater than one it is more reactive. For example, if a stock's beta is 2.0 and the S&P 500 drops by 5%, its share price could be expected to drop 10%.
Although past performance doesn't guarantee future results, there are some historical patterns that tend to continue. Specifically, stocks with a history of profitability and consistent earnings growth tend to keep up. And stocks with a strong history of dividend increases are extremely likely to increase their dividends in the future. Do a little research and compare the historical behavior of the stocks you're considering.
Finally, there are some dangerous traps rookie investors should avoid. This is not an exhaustive list, but these are among the costliest:
It seems foolproof – buy calls when you’re bullish; buy puts when you’re bearish. You know how much you can lose from the moment you initiate the trade.
But, more than 75% of stocks trade sideways over the long haul. That means only a quarter of stocks make a noticeable move up or down in a given time frame. What do you need when you buy options? Movement!
Sellers, on the other hand, love “stuck” stocks. Trading ranges are profitable territory for sellers. Plus, they know how much they can WIN upfront because they hit their jackpot, the moment they make their trade.
If you have better things to do than hope the underlying stocks move enough to make your long options profitable, I’ve got five rules to help you sell options for profits.
Most buyers (even the seasoned ones) are prepared and expect to lose some of their money and are OK walking away with empty pockets. To start winning consistently, you must get out of the buyer mindset.
Sellers don’t play with Teen Patti Money or “risk capital.” That will get you blown out of the water, with no lifeboat to get back in to rescue yourself.
Your foundational portfolio is your starting point for making an income out of options. There will be stocks that you love, stocks you hate, and stocks you’ve owned for so long that you can’t bear to part with them.
The best of what you can make on these “money-hole” stocks to make them pay you for your patience … and to sell some puts on stocks you wouldn’t mind owning someday, for good measure.
It’s not about how much money you have — it’s about how you can use it to make how much money you want in any given month.
Whether you’re working with ₹25,000; ₹50,000; ₹1,00,000 or more, set a target for each month. 2% percent is very reasonable and translates to 24% a year. That’s better than the BSE, NSE, and MCX combined, most years!
With a ₹5,00,000 account, you need to make ₹10,000 a month to hit that 2% goal. Revise your goal a little higher, say to ₹15,000, to provide balance if any of your trades don’t work out.
Most buyers pick options that require a Herculean move from the stock to make them profitable. But those out-of-the-money option values plummet as expiration nears. When the clock runs out, there’s no earning back, that cash–time is the buyer’s mortal enemy.
Selling options that expire in a couple of weeks or, at most, a couple of months is a proven strategy that provides consistent returns. Best of all, you can repeat the profit cycle every week or month to meet or even exceed your income goals.
Selling options on slumping stocks is only part of the fun. You can also profit from directional moves. Unlike the traditional buyer, who needs a big, one-way move, sellers are uniquely positioned to profit from the movement in either direction.
Many “sleep and wake” stocks have excessively volatile option chains (like Citigroup (NYSE: C)). The higher the volatility, the bigger the premiums for option sellers. We always recommend options with some windows for space i.e. volatility in the 25-35 range.
To get the most lucrative and rewarding premiums, you should sell when volatility is at the peak of expansion in that range and cash out when volatility contracts.
This is another way a buyer gets chomped – they tend to buy and watch their option value crash down and burn overnight, simply because the wind went out of their option’s sails … and blew the sellers’ way.
Option buyers don’t get rich from buying options. Sure, they can get the occasional big winner, but it’s usually cancelled out by a bunch of losers.
Option sellers aren’t going to get rich overnight, either. But their winning average is far-more-impressive. Over time, a few dollars earned here and there can add up to a pretty nice chunk of change over time, especially when it’s reinvested.
The secret is to keep your monthly goal in mind at all times. And to not only identify target prices on your options but also to set automatic buyback orders at 30% to 50% profitability. Buyers get caught up in guesswork and emotions, whereas sellers benefit from avoiding the fear and greed that plagues their buyer counterparts.
Yes, buyers know their risks before getting established, but so do sellers! Better yet, sellers are net-cash-positive from day one, and they keep that money and have it earning interest in their accounts.
The big risk to buying is that there is always a looming danger of losing all your hard-earned money in one lousy trade. Sellers are far more realistic and disciplined in their expectations and trade management. Once you’ve “won,” which you do right away, you strive to keep the bulk of those returns.
Sure, sellers can have shares “called away” or “put” to them. But if you keep your options out of the money, manage your expectations, and adhere to profit targets, you can stay ahead of the market and be safer than your “buyer” counterparts. In fact, the only real risk is that there is a profit that could have been yours!
Individuals who want to invest in equities need to understand the risks associated with investing. Investing in shares can be highly lucrative and can set you up for a bright financial future. However, understanding the risks and benefits associated with buying shares is a crucial step for your education.
Investing in shares, like any investment, comes with a certain amount of risk. Shares are often described as 'high-risk asset classes' when compared with other types of investments. The primary risk of investing in shares is that it can result in a loss of capital.
Unexpected events outside of your control or negative developments within the company can significantly affect share prices and the value of your portfolio. In saying that, this is not to scare you away from investing in shares, but merely a necessary understanding that all investors must-have.
There are ways to reduce the risk associated with investing in shares. The following are common measures that investors should have in place to control the risks associated with buying shares. Keep in mind that this is general advice only and may not be suitable for your personal circumstances.
Not having all your eggs in one basket is a motto that strongly applies when it comes to buying shares (famous words by Warren Buffet). Probably the worst mistake a new investor can make is to not diversify adequately. Diversification refers to making sure an investor has shares in several companies of different industries/sectors/countries etc., thereby reducing the risk relative to the return.
The degree of diversification is to the discretion of the investor. For example, if you decide to invest your entire portfolio in a single company dominated by the oil price, a collapse of the oil price will result in a collapse of your entire investment. Hence why it is important to diversify across different industries. Diversification on the share market can take many forms, for example investing in different sectors or different countries or both.
For example, a well-diversified portfolio may have exposure to Telecommunications, Materials, Financials, Consumer Staples, Information Technology and International, just to name a few.
The difficult part is knowing which sectors are most suitable and more importantly which companies within the sector are suited to your investment goals. One of the problems that often arise with diversification is that investors diversify at the cost of understanding their investments. Diversification is an important step when building your own portfolio.
It is vitally important to understand the company you are buying a share of. These days many investors forget that when they buy a share they are actually buying a part of a business and not just a digital ticker code. Without fully understanding the company's operations, its financials or future outlook it is very hard to determine if it will be a good investment.
The problem arises when you are interested in a firm, however, you are unable to fully understand its business model. In order to diversify adequately, you may be forced to look outside your scope of understanding. If you don't have the time or expertise on how to analyze companies a finance professional may come in useful. Having a professional equity analyst to contact and discuss the company will potentially lead to better investment decisions.
Different strategies can lead to success, however, in Wise-owl's view investors have the greatest chance to succeed in the stock market by taking on a long-term approach. An investor’s holding period (how long the investor plans to hold the shares) is crucial when it comes to investing. The shorter the investment horizon, the harder it is to predict the direction of the stock.
Market fluctuations are regular, mostly unprovoked and are hard to predict. A common mistake among investors is to sell after a fall and buy after a rise. This results in complete absorption of the fall and missing out on the rise. The rule of thumb is don’t try and time the markets, have long term outlook and invest in good companies.
Emotions are likely the number one challenge investors face on a day to day basis. Media speculation, your Barber’s stock tips, fear of missing out or running with the crowd are all factors that affect our emotions and in turn our investment decisions.
Removing emotion from your investment decisions is easier said than done however having an investment strategy and the discipline to stick to it, can reduce the risk of emotional decision making.
Now that we have spoken about the risks associated with investing and how to reduce them, we will analyze the benefits of investing. There are several reasons why an individual chooses to invest in the stock market.
There is hardly any other investment vehicle that facilitates such a diverse set of objectives like the equity market. The stock market facilitates investors from all geographies and all investment styles. The following is just some of the main benefits of investing in shares:
Over the long term, shares have outperformed every other investment vehicle including property, bonds, cash and several others. We emphasize that this is over the long run as shares do fluctuate more than most other investment vehicles.
If you are unlucky with your timing or stock pick you might not outperform, however in the history of the stock market shares have increased in value despite several bear markets or 'market crashes'.
Some shares also provide income by the way of dividends. Dividends are the shareholder's portion of the company’s un-retained earnings. Dividends are generally paid by larger corporations with an established income profile and years of reliable earnings.
Most companies pay out a certain percentage of their earnings through dividends, which means that the net payout will grow if earnings grow. Dividends can be received in cash, by cheque or be reinvested in the company, also known as a 'Dividend Reinvestment Plan.'
Shares are more liquid than other investment vehicles. When we refer to liquidity we basically make reference to how easily an investor can find a buyer or seller for a transaction. The largest companies listed on the respective stock exchange offer the average investor with enough liquidity to buy and sell shares instantly.
This provides investors with the flexibility to use their funds where they see fit. It is important to remember that transactions are subject to brokerage fees and need to be incorporated into your calculations. Smaller companies also known as small-capitalization stocks may not offer enough liquidity to allow instant transactions on a daily basis.
Stock markets provide investors with the opportunity to gain exposure to several sectors and markets. For example, a young couple with their entire savings invested in property will only have exposure to the property market.
If the property market declines, the young couple will be fully exposed to the decline. Whereas a young couple with a diversified share portfolio can have exposure to several sectors and markets and can therefore reduce the impact of a sector-specific risk.
The most important point to remember is that there is no secret to successful investing. The only rule is to buy great companies and buy them at the right price. This has over time been a proven way to achieve success on the stock market. Being aware of the risks and rewards of investing in the stock market is crucial for the decision-making process. There are basic principles that allow you to minimize the risk of investing as outlined above, however, there is no way to completely remove risk.
Investors hoping to maximize their gains try to identify stocks that are mispriced, creating long opportunities for under-priced companies and short opportunities for overpriced shares. Not everyone believes a stock can be mispriced, particularly those who are proponents of the efficient markets hypothesis. Efficient market theory assumes that market prices reflect all available information regarding stock and this information is uniform. Such observers also contend that asset bubbles are driven by rapidly changing information and expectations rather than irrational or overly speculative behaviour.
Many investors believe markets are mostly efficient and some stocks are mispriced at various times. In some cases, the entire market can be pushed beyond reason in a bull or bear run, challenging investors to recognize the peaks and troughs in an economic cycle. Information on a company might be overlooked by the market. Small-cap stocks are especially prone to irregular information because there are fewer investors, analysts, and media sources following these stories. In other cases, market participants may miscalculate the magnitude of news and temporarily distort a stock’s price.
These opportunities can be identified through several broad methodologies. Relative valuation and intrinsic valuation both focus on a company’s financial data and fundamentals. Relative valuation employs a number of comparative metrics that allow investors to evaluate a stock in relation to other stocks. Intrinsic valuation methods allow investors to calculate the value of an underlying business independent of other companies and market pricing. Technical analysis allows investors to identify mispriced stocks by helping them to identify likely future price movements caused by the behavior of market participants.
Financial analysts employ several metrics used to relate price-to-fundamental financial data. The price-to-earnings ratio (P/E ratio) measures the price of a stock relative to annual earnings per share (EPS) generated by a company, and it is usually the most popular valuation ratio because earnings are essential to determine the actual value the underlying business provides for earnings. The P/E ratio often uses forward earnings estimates in its calculations because prior earnings are theoretically already represented in the balance sheet. The price-to-book (P/B) ratio is used to show how much a company’s valuation is generated by its book value.
P/B is important in the analysis of financial firms, and it is also useful for identifying the level of speculation present in a stock’s valuation. Enterprise value (EV) to earnings before interest, taxes, depreciation and amortization (EBITDA) is another popular valuation metric used to compare companies with different capital structures or capital spending requirements. The EV/EBITDA ratio can help when evaluating firms that operate in different industries.
Yield analysis is commonly employed to express investor returns as a percentage of the price paid for a stock, allowing the investor to conceptualize pricing as a cash outlay with potential for returns. Dividends, earnings and free cash flow are popular types of investment returns and can be divided by the stock price to calculate yield.
Ratios and yields are insufficient to determine mispricing by themselves. These numbers are applied to relative valuation, meaning investors must compare the various metrics among a group of investment candidates. Different types of companies are valued in different ways, so it is important for investors to use sound comparisons. For example, growth companies typically have higher P/E ratios than mature companies. Mature companies have more modest medium-term outlooks and also typically have more debt-heavy capital structures.
The average P/B ratio also varies substantially among industries. While relative valuation can help determine which stocks are more attractive than their peers, this analysis should be limited to comparable firms.
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Some investors ascribe to the theories of Columbia Business School’s Benjamin Graham and David Dodd, who contend that stocks have an intrinsic value independent of the market price. According to this school of thought, the true value of a stock is determined by fundamental financial data and usually relies on minimal or zero speculation regarding future performance.
In the long-term, value investors expect the market price to tend toward intrinsic value, though market forces can drive prices temporarily above or below that level. Warren Buffet is perhaps the most famous contemporary value investor; he has implemented the Graham-Dodd theories successfully for decades.
Intrinsic value is calculated using financial data and may incorporate some assumptions about future returns. Discounted cash flow (DCF) is one of the most popular intrinsic valuation methods. DCF assumes a business is worth the cash it can produce, and that future cash must be discounted to present value to reflect the cost of capital. Though advanced analysis requires a more nuanced approach, balance sheet items at any given point in the life of a going concern merely represent the structure of the cash-producing business, so the entire value of the company can be determined by the discounted value of expected future cash flows.
Residual income valuation is another popular method for calculating intrinsic value. Over the long term, the intrinsic value calculation is identical to discounted cash flow, but the theoretical conceptualization is somewhat different. The residual earnings method assumes a business is worth its current net equity plus the sum of future earnings in excess of the required return on equity.
The required return on equity is dependent on a number of factors and can vary from investor to investor, though economists have been able to calculate the implied required rate of return based on market prices and debt security yields.
Some investors forgo analyzing the specifics of a stock’s underlying business, opting instead to determine value by analyzing the behaviors of market participants. This method is called technical analysis, and many technical investors assume market pricing already reflects all available information regarding a stock’s fundamentals. Technical analysts forecast future stock price movements by forecasting the future decisions of buyers and sellers.
By observing price charts and trading volume, technical analysts can roughly determine the number of market participants willing to buy or sell a stock at various price levels. Without major changes to fundamentals, the entry or exit price targets for participants should be relatively constant, so technical analysts can spot situations in which supply and demand imbalances at the current price exist. If the number of sellers at a given price is lower than the number of buyers, then it should drive prices upward.
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