How do I make my money trading?

For the naive newbies like me, this is the first question that jumps to mind. Here's a little bullet list of how it works and how if you make a wise investment you can make money.

• When you buy a stock, you invest in the company or the enterprise.
• The underwriters or the investment banks decide the initial value of the stock.
• Let us say the stock price is set at Rs.25 and the company has listed 440,000 shares.
• If the company makes Rs 1,000,000 profit annually, then each share or stock would get 1,000,000/440,000 = Rs 2.72 per share profit (or earnings per share)
• So if I own 100 shares of this company I would be eligible for Rs 272 at the end of the year in returns.
• However, the management of the company has a say in which form and what amount they can return the Rs.272 you expect to get.
• They can send you a cash dividend of some portion or entire amount. This cash can be used to buy more shares or invested in some other asset.
• The company can take decisions of repurchasing the shares.
• The company can reinvest the funds for future expansions and growth.
• It can strengthen its balance sheet by reducing debts or adding more liquid assets.
• The higher the Return on Equity, the better choice for your investments.
• In layman terms if the price of the share increases, you stand to gain.
• Secondly, the dividends paid to you are your returns on the investment you made in the company. so the higher the profit of the company, better you earn.
• On reading various websites, it came to my notice that trading frequently is an investing mistake one can avoid. Its vital that you choose your investment wisely and then be patient :) Patience pays!
• The formula "buy low sell high" is the underlying equation that stands true to make gains.
• Another excellent quote by Warren Buffet was to not follow the herd, that is not follow other people based on fear of losing out.
• With this little bit of information in hand, it now essential to know how to read a balance sheet.
• It is necessary to look at the company's balance sheet, income statement and cash flow statement.
• The balance sheet gives an idea about the company assets, debts and stockholder dividends.
• Cash flow statements give an idea about the expenditures undertaken by the company.
• The income statement gives an idea about the company's profits or losses.
• Detailed explanations in the next post!

Priyanka S Vaidya