Investment 101:

Apart from understanding the basics of the stock exchange, I will also blog about the other peripherals necessary for this project. It involves deciding certain trading philosophies, understanding investment basics and of course getting the right tools for the trade :)

• Investing in its most basic definition is making your money work for you by rendering more money!
• Investing involves a little bit more of risk taking than saving money.
• Investing has a very defined risk-reward ratio, higher the risk, higher the rewards (most times).
• When you buy a stock, you invest in the company. In case you have a greater share of the stock in the company, you may even vote on certain important topics!
• Your income potential is directly proportional to the growth of the company, so needless to say invest wisely!
• As opposed to savings, there is always a risk involved in stocks of losing money.
• It is necessary to do a certain amount of research before investing in a certain company.
• It will be useful to look at the entire company's or corporation's market capitalization. As explained in a post before, the market capitalization is the freely available trading stock issued by the company times the current value of each share.
• It is necessary to investigate the price to earnings ratio. This mathematical ratio determines how much money you are paying for Rs.1 of the company's earnings. E.g: Company has reported a profit of Rs.2 per share and the stock value is Rs.20 per share, then the p/e value is 10.
• Technology companies may sell at an average of 40 p/e, while textile manufacturers may have the ratio as low as 8. This makes it feasible to compare two companies within the same sector. An example to help clarify the p/e ratio is as follows: Company ABC and XYZ are both selling share for Rs.50.  ABC has reported earnings of Rs.10 per share while XYZ has reported Rs.20 per share. p/e ratio for ABC is 5 whereas p/e ratio for XYZ is  2.5. Thus we are getting twice th e earning power in case shares for XYZ is purchased!
• It is important to study whether the company is reducing the total number of outstanding shares. Although it may seem counter intuitive, the investor will reap higher returns when the company orders a buy back for the shares. In short you get a larger piece of the pie, if there are less people to share it with! :)
• Finding out the basics such as current value of the company shares, its market capitalization, its p/e ratio, its management and future growth is a very critical factor before beginning the buying spree.
• Last and certainly not the least, "patience" is the key criteria. You should have the temperament (and the resources) to buy a stock and hold on to it to see it grow!

Priyanka S Vaidya