Stock Market Basics-4

The risks involved in investing Equities
The share prices are affected by factors that comes from within the company ( change of Management, change of policy of company, change of Human resources, fires and accidents in a company ), and the factors outside the company ( General Market condition, Economy, Sector demand and supply, Government Policies, International Wars, Foreign Policy, Demand in the International Markets, etc ).
So equities involves risk. But in a fixed deposit the risk is almost nil ( But it too have some risk. In case, if a Bank fails ). As we have seen earlier, Equities are riskier but they give good rewards. So while investing we should reduce our risk. How can one reduce the risk involved in equities.

Here comes diversification. One should not invest the entire amount at his disposal in a single share or sector. To reduce risk one should use basket of stocks. If one stock or one sector underperforms the market, the other sector or stocks which performs well will compensate the growth. Thus one can see good growth of his portfolio.

Stock Market Basics - 3

When you put your money in banks, the bank pays you an interest. The relation between you and your bank is, as it is between a borrower and lender. But in the case of buying shares, you are giving your money to the company to become a partner of that company.
Since you are a partner of that company, you are also a part of the profit and loss of the company. When the company is in profit, the profits will be shared to you according the number of shares you are holding. In case of loss, though they won’t ask you, the value of the share will go down accordingly.
In a bank deposit, the risk is almost nil, though there is some risk associated with it. But in case of equities, the entire capital you have invested is at risk. But the return you get in bank deposit, which is  the interest, is always fixed and small. But the return you get in equities is always high but at the same time, if the company doesn’t perform well, then you are likely to lose the entire capital invested.
So, by investing in equities, you expose your money to high appreciation and also to high depreciation. The risk involved in equities is very high and at the same time the return is also very high. Though the risk is very high, the reward ( here it is the return from equities ) is also very high when compared to bank deposits.
The return on equities is some times phenomenal. Equities appreciate by two times or three times or more than that in a short span of time. Your capital will be doubled in every eight years in Bank deposits. But in shares, in a bull market, your capital will be doubled within few months.

Stock Market basics-2

Every body should invest to financially  protect himself for the rainy day. Investment is different from business. Business is the source of your income. What ever you invest in the business in not your investment. But some spending like buying land for the business can be a investment. So basically business and investments are different.
Investment is for the rainy day. But business is for our regular income. There are different type of investments. It may be shares, Gold, Bond, or real estate. But what you save in banks as deposits are savings. There is a difference between savings and Investment.
Savings can be done in any form. It is saving the excess money in banks or in your locker itself. Savings would not grow as it is. When your savings turn into a investment, it is likely to grow. Properly saved money is a good investment. Savings are not associated with any risk. But investments are associated by with some risk. So investments are risk capital. Where as savings are not.
So Business, Savings and Investments are three different thing. If you could identify these three things, then you have passed your 10th standard in finance. Stock Market investment is an Investment. Stock Market Investment is a risk capital

Stock Market basics-1

Stock Market investments are long term investments that should not be funded by short term debt. Always invest the surplus in Stock Market. Investments in stock market can be done at any age. But as the age increases one should reduce the exposure in stock market to half of his portfolio.
In the long run, equities always offer the highest returns. The amount that can be invested in stock market depends on two criteria. The risk profile of the person and two, the liquidity requirements of the person.
Risk profile
Equity investments are not free of risk. Person who has debts should not invest in Stock Markets. Person who has good career with stable income can take lot of risks in Stock Market. Person who is retired and who is not earning now should take small risk in the stock market.

Liquidity
Liquidity means the need of cash to meet one’s repaying obligations. A person who has debt is in need of liquid cash to meet out his obligations. So he should not invest in Stock Market. A person who has excess money and who has little requirement of liquid cash, can invest a lot in market. A person who has retired from job also is in need of liquid cash to meet out his recurring obligations like rent, telephone bills etc.

Investments in Stock Markets should be done based on risk profile and liquidity requirement of a person.