Understanding the Beast-Chapter 1

Let’s start with the two popular styles followed by investors to invest in the stock market. They namely are:

• Fundamental  analysis
• Chart Analysis

Some investors choose to analyze a stock using only one of the above, but according to me you need both of the  above mentioned skills to get a clear picture.

Fundamental Analysis

Fundamental analysis basically refers to analyzing the financials, performance. In lay man’s terms this means that you are finding out how the company has been performing, has it been making a loss or a profit, is the company in too much debt, is the company utilizing its money and the most important one-“Is the company growing”. You can find out all of this by looking at the financials of the company. The most important parts of a company’s financials are:

• Balance Sheet
• Profit and Loss Account[P&L]
• Cash Flow
• Quarterly Results

These are the basic financials of the company one must analyze before investing in it. I’ll be explaining more about this in my next post.

Chart Analysis

Now as we all know that the financials of the company aren’t all that need to be analyzed. The movement of a stock on the stock market is also because of investor sentiment. This is a big factor in the stock market; investor sentiment plays a major factor on the direction of a particular stock. We can judge investor sentiment to a certain extent using the charts of the basic stocks. The Basic tools we must familiarize ourselves with in order to successfully analyze stocks are:

• Moving Averages [Simple and exponential]
• Volume
• Trendlines
• Chaikin Money Flow
• OHLC Chart type
• Gaps and Basic Chart Patterns

As we familiarize ourselves with this we will delve deeper into chart analysis and learn more complicated stuff.

For now this will be all, my next post will explain Fundamental analysis more clearly. Till then I want every one of you to get to know the site www.moneycontrol.com, create an account and a portfolio because trust me while you learn stock market investing, this site will be your best friend.

The Big Giant

The stock market is a dangerous big animal that is capable of marvelous feats. It can be a generous queen who can make you a fortune as well as a high maintenance girlfriend which can cost you a fortune. The one important thing we must learn before venturing into the stock market is that believe in yourself.

We all know that the stock market can go either up or down depending on factors we cannot control. You must be wondering, if the stock market is this volatile then how can you make money?

Now contrary to ‘popular belief’, a lot of people are of the opinion that the stock market is rigged and controlled by a few big, rich and powerful men. If your one of the few who doesn’t believe so, then you’re one of the smart ones. The primary reason why the stock market cannot be rigged is because the stock market is too big a beast to be controlled. Basically on an average millions of shares are traded on the stock exchange and controlling such a volume of shares is impossible. Now there can be a few exceptions but that can only happen in small cap companies (Small cap companies refer to small companies with a lesser number of shares traded on an intraday basis).

Now the most commonly used way to make money in the stock market that I personally use is not intraday trading but medium term trading. Now the stock market as a long term investment might not be a good idea as it keeps going up and down so the net return you would receive is not very high. For example, The Dow from 2000 to 2010 moved up effectively by around 200 points while the Sensex in the last 3 years has visited the 16000 range thrice.

From these examples it is quite clear that long term investing is risky(As opposed to the popular belief that long term investing is safe). At this point I would like to quote something about the stock market which my father still tells me, “The market has the capability to remain irrational for a far longer time than you being able to stay solvent”.  Thus the one thing that we must never do is get carried away.

When investing in any stock have your exits clearly marked. As in you need to set a stop loss (this means that if the share price falls below this value then you sell the stock and bear the loss) and at the same time you need to set a price at which you will book your profits and sell the shares. Both of the above mentioned values depend on personal risk appetite.

Now it is up to you to set those values and it is important that you stick to these values, so make it a point you decide your risk appetite today.

Cheers,

Shail.

Why Invest?

Why Invest?

Today I am writing about the basic motivation behind investing. I know a lot of you must be thinking why you should invest as you can live happily by just getting a MBA degree and a safe job. Well the problem with this notion of a so called “Safe Job” is that it is not safe anymore. As we all must have read that inflation is an ever increasing beast and like it or not it is not likely to go down. The cost of living has been ever increasing and at one point it will reach such a level that your salary will not be able to buy you the basic luxuries that you previously enjoyed, this is the bitter truth.

Instead of having money in the bank, it is better if we put it to good use, here is where investing comes in. There are multiple sectors for investing; we can invest in almost anything. For example a fundamental and basic investment is considered to be education. An innovative example of an investment would be buying a car. Now you would be wondering that how is car an investment, well let’s say you own a company and you travel a lot then the car would help you save time and you could use this time productively elsewhere.

Talking strictly in financial terms an investment would be buying of an asset. An asset can be defined as something that either gives you monthly income or something that grows in value over time and gives you returns.

Liabilities are the opposite of asset’s they consume resources and do not give you a monetary return. The differentiating line between assets and liabilities is thin. In the example of a car mentioned above we can very well treat the same car as a liability because it eats money in the form of petrol.
You would be now be wondering, how the car can be an asset as well as a liability. Well if the car is a Maruti 800 then it is an asset and if it is a Mercedes then it’s a liability (A Maruti serves the basic purpose of travelling fast while a Mercedes costs more money because of luxury and better brand name).

The most common sectors of investing are the following

1. Real Estate
2. Gold
3. The Stock Market

In the coming posts I will be talking about investing in the Stock Market and I will use the Indian Stock Exchanges BSE and NSE and I will also use Nasdaq and Dow to cite examples.

Cheers,

Shail.

Understanding Finance

Finance is basically, understanding the concept of money. Finance is a very important subject because it is fascinating and important at the same time. To become successful in any field an understanding of finance is required.

Money moves the world and hence it is important for us to understand how to move money. Basically there are two ways to earn money

1.Salary-This is basically the fixed amount of money you receive at the end of a certain amount of time because of the work you have done or services you have rendered.

2. Investments-These are basically assets or products that you have bought and that grow over time and keep giving you money without having a physical input from your side.

According to me the latter is of more importance because it has no boundaries on its growth. What I am trying to say is that while the salary a person is paid is basically dependent on the amount of work the person puts in while an investment gives you returns even when you are not working.

Investment is a very broad term and includes a lot of areas ranging from the stock market to making movies. I am going to start off with the stock market and then broaden up on the other major sectors that come under Investing.

The Stock Market

Basically the stock market is a platform that is used to buy and sell companies. Now when I say companies I do not mean complete companies (though this can be done) but parts of the companies are sold. Now a share is like the fundamental unit of a company. Let’s say a company consists of 2000 shares this means that when you buy a share of this company you are actually buying 1/2000^th (.05%) of this company. Now in reality a company is composed of more than a million shares and hence it is difficult to actually buy a company on the stock market.

Now the basic way you make money in the stock market is that when you buy a share of the company and then the prices of the share rise, (this could be due to multiple reasons but the most fundamental one is the good performance of the company) you can sell these shares to some other person and make money. In the coming articles I’ll elaborate more on this and then write about how to invest in the stock market.

Cheers

Shail

If you have any feedback's please feel free to comment and if you have any specific topics you would like to know about i would love to hear about them.