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Home Beginner's Training

Beginner's Training

About us

Hello Investors! Investments are an integral part of life and we understand that investment choices can get tricky. The usual questions which arise in investor's minds are whether to trust the investment instrument or not, what's guarantee of minimum returns and many more. One of the worst fears of new investors is their lack of knowledge which holds them back from diving into stock markets.

Fear not, JK Securities is here!

Beginner's Luck is an exclusive page to provide information regarding investments and markets to new investors. We hope that this information can help you make wiser investment choices and help you get lucky with higher returns. This page contains information regarding equity, debt and Mutual Funds.

YOUR PERSONALISED WALLSTREET JOURNAL

The financial world essentially comprises of three main elements - Financial markets (where investors with surplus fund move their funds to investors with deficit funds), Financial Securities (funds take form of either equity or debt) and Financial Intermediaries (third party facilitating the movement of funds from surplus to deficit end). As household investors we invest our money into shares (equity), bonds (debt), mutual funds (equity or debt). The following gives a brief description of the above mentioned.

SHARES:

Shares represent ownership of the company. The holder of equity shares owns the equivalent percentage of the company and has voting rights. Shares are high risk- high investment instruments. One can daily trade in shares (buy and sell within one day). We would recommend that daily trading should be carried out by investors with sufficient market knowledge and large appetite for risk. Beginners can use shares as an investment tool where you can buy shares of a company and sell them when it fetches you a good return. Shares earn dividends as well. When a company makes huge profits, these profits are distributed to the share holders in the form of dividends. Thus by holding shares you gain from the increase in share price and earn dividends during your waiting period.

Companies list themselves on the exchange for their shares to be traded by the public. An Initial Public Offering (IPO) is made where the shares of the company are sold to the public for the first time. If you wish to buy shares during an IPO, simply drop into any of our offices to know more about upcoming IPO and the procedure. Companies list themselves on the exchange for their shares to be traded by the public. An Initial Public Offering (IPO) is made where the shares of the company are sold to the public for the first time. If you wish to buy shares during an IPO, simply drop into any of our offices to know more about upcoming IPO and the procedure.

market index. In India, we have National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) which act as a trading platform for buyers and sellers. The index for NSE is Nifty 50. It fluctuates according to demand and supply for specifically listed 50 scripts i.e the movement in these 50 scripts determines the movement in all the other scripts. Similarly, SENSEX is linked to BSE. SENSEX moves according to the movement in 30 scripts. JK Securities is a direct member of NSE and a sub broker of BSE. By opening demat and trading account with us, you can buy and trade shares listed on both NSE and BSE. Click here to know more. Shares can be held either in physical certificate form or in electronic form. Holding electronic shares make it easier to buy and sell them on the exchange. If you are holding any share certificates, you can bring these certificates to JK Securities and we can dematerialize these shares for you. We all read/listen to financial news, but sometimes the terms used are too complex to grasp. Here is your personal financial dictionary to help you understand a few common terms.

  • Stop loss:Stop loss helps you to define your loss limit. Say you bought Stock A at Rs 500 per share. For some reason the price drops to Rs 400 incurring a loss of Rs 100. You can inform your broker to set stop loss at Rs 350. When the price reaches 350, a sell command is automatically triggered in the system and your stock will be sold. By setting a stop loss at Rs 350, you limited to loss to Rs 150. Stop loss can be beneficial if the stock is highly volatile.
  • Long/short sell: Switch on CNBC during market hours and all you can hear is long stock X and short sell stock Y. What market analysts refer by long is that you can buy that stock. Short selling refers to selling that stock
    despite the fact that you don't have it. This can be understood as borrowing the stock from your broker. Mind you, if you short sell, it is advisable that you buy back the stock and square off your market position within the same day before market closes.
  • Initial Public Offering (IPO):It is used by an unlisted company who wishes to raise funds by issuing equity shares. It results in the company's stock being listed on an exchange.
  • Bullish/Bearish: Bullish markets are hopeful of a rise in price. On the other hand, bearish markets indicate a fall in price.
  • Volatility: It refers to the changes in price movements. Higher volatility means that the stock price can jump up or jump down by a large amount. Volatility refers to the amount of uncertainty or risk about the size of changes in a security's value. For investors with a low risk appetite, it is better to invest in stocks with low volatility.

You can apply for these new shares by simply filling a form at JK Securities or you can apply for IPO online. Click Here to know more about IPOs.

Types of Stock

There are various forms of stock. The two basic types of stock are common stock and preferred stock. Common stock is usually traded in the market. Dividends are earned on common stock and shareholders enjoy voting rights in the decision making of the company. The main drawback is that when dividends are distributed, the company is obliged to pay out dividends first to preferred stock holders. Thus, only the residual dividends come to common shareholders. In the case of preferred stock, shareholders have no voting rights but have preferred rights over dividends distribution. The main advantage of holding preferred stock is that when a company is being sold, their claims on company's asset are given Newspapers keep talking about a company issuing bonus shares, rights issue or stock split. Here is a brief explanation of what these terms exactly mean.

  • Rights Issue:In Rights issue, the company issues rights to existing shareholders to buy fresh shares. These new shares are usually offered at a discounted price than the market price. The company can raise funds through rights issue, unlike bonus issue.
  • Stock Split:Stock split increases the number of shares in a company without affecting the share valuation. If the existing share value is Rs 10 and the company declares stock split of 1:2, then one share of Rs 10 is split into 2 shares of Rs 5 each. Thus, the share valuation is unaffected but the number of shares increases.
  • Bonus Share: A company issuing bonus shares gives out free shares to its shareholders on the basis of existing shares. The company converts a part of its excess reserves into shares and these new shares are then given out as bonus shares. For example, if you have 10 shares and the company declares 2:1 bonus, then you are entitled to 5 new free shares. When a company declares bonus issue, it indicates that the company has a huge amount of excess reserves. It signals that the company is doing well.

How does Stock Price move?

Stock price fluctuates mainly due to market forces of demand and supply. If people speculate that the stock will perform well, the demand for that particular stock rises. This creates an imbalance between the demand and supply of that stock creating a surge in stock price. Similarly, if a majority of the players are selling a particular stock, the price crashes. There are various other factors which affect stock price. These can be mainly divided into company factors, market factors and idiosyncratic factors.

  • Company Factors: An increase in company's profits can cause its stock price to rise. Increase in profits indicates that the company is doing well and hence, more people want to buy that stock. This causes a rise in price. Other factors such as takeovers and acquisitions affect stock price. In 2010, when Kraft decided to acquire Cadbury, there were price fluctuations in the stock of both companies. Kraft's stock price dropped after they decided to fund the takeover by issuing debt.
  • Market Factors: If the country's economic growth is high, the demand for goods and services will be high. This leads to higher company profits and increase in share price. Interest rates have an adverse effect on stock price. High interest rates increase cost of capital which means that companies need to make bigger interest payments affecting their residual profits. Thus, share price drops. On the consumer side, since it is more expensive to borrow, the demand side is affected. Other factors include currency movement, inflation etc.
  • Idiosyncratic factors:These factors are non market factors which affect stock price. When Apple's CEO Steve Jobs passed away, the stock price of Apple Inc fell. Geo-political tension between countries can adversely affect stock price.

Picking the Right Stock

There are about 1400 companies listed on NSE and over 4900 listed on BSE. You possibly can't scan all of these and then come up with a bunch of stocks to invest in. Here are a few things to look out for before you make your basket of stocks.

  • Market Capitalization: It refers to price per share multiplied by number of shares outstanding. This doesn't include the shares of the internal members of the company. A company can fall under three categories - small cap, mid cap and large cap. It is better to invest in mid cap or large cap companies since small cap companies are difficult to track. Movements in small cap companies are usually not followed by financial press or by large brokerage houses. Small cap companies usually have low trading volumes and hence, their stock is vulnerable to high volatility.
  • Trading Volume: It is important to check how many shares of the company are traded during a day. The higher the trading volume, the better. This is so because a large number of buyers and sellers exist in the market. This reduces the price volatility and traders cannot manipulate stock price. We would advise you to stay away from stock with low trading volumes.

Key indicators to look for

We all carry out extensive research before we buy any product like cell phones, TVs or even an air ticket. So why not do a bit of research before buying stocks? Well you can visit the company website and see how fancy it is, but by looking at some facts and figures you can make wiser investment decisions. The following indicators can be easily found in the annual report

  • Profitability Ratios: These help us see how well the company is performing and can help compare a bunch of companies against each other. Higher ratios indicate a better picture. Operating Profit is the most important indicator of company's profits. This is because it is a measure of company's profitability at its operational core level. Return on Equity can be used to judge a company's efficiency in utilizing invested capital. The higher the ratio, the better the company is at utilizing shareholder's capital.
  • Liquidity Ratios: These ratios are usually listed in the annual report. If not, these can be easily calculated using the information in the annual report. Liquidity Ratios indicate the company's ability to pay its short term liabilities. We need to check whether the company has enough assets to cover their liabilities. Current ratio measures how many times current assets can over current liabilities. Cash Ratio helps us look at the company's ability to cover its liabilities.
  • Company performance: Companies are obliged to submit performance reports to their respective exchanges. These reports inform us about the company's performance and their future prospects of profitability. If the company is doing well it will be signaled in the market by an increase in stock price.
  • Debt Ratio: Debt ratio indicates company's level of borrowing. A certain amount of debt signals good firm quality. This indicates that the company can borrow and are capable of repaying this debt by operating well and making profits. After a certain level of debt, bankruptcy costs come in which give out a bad signal followed by a drop in stock price.
  • Dividends: If the company is paying out huge dividends it indicates that the company is doing well. But we need to keep an eye on where these dividends are coming from. If they are coming from reserves, it could indicate low profitability. If the company continues to issue dividends using their reserves, it could so happen that the company runs out of reserves. This shall be signaled by a drop in stock price over a period of time.
BONDS:

Bonds represent debt owed by the issuer to the investor. It is a borrowing tool used by companies to raise funds. Bonds are simply claims which pay periodic interest (called coupon payments) till maturity. On maturity, the face value (principal amount) is returned. The maturity and coupon value of the bonds are mentioned on the bonds and are usually fixed. There are various types of bonds - perpetual bonds don't have maturity date, index linked bonds are linked to the inflation rate of the country, convertible bonds can be converted in equity, government issued bonds etc. Corporate bonds fetch better returns but they are riskier as compared to government bonds.

Debentures fall under the debt category. It is issued by a corporation that is not secured by specific assets, but by the general credit of the corporation. Bonds are a safer investment tool than shares. This is so because it returns the face value at maturity and fixed coupons are received every year till maturity. Now, some people think that coupons and dividends are similar. The major difference between them is that the bond issuer has the obligation to give coupon payments every year, but the company is not liable to distribute dividends every year. Thus, bonds guarantee you an annual return till maturity unlike shares.

MUTUAL FUNDS:

Mutual funds pool resources from various individuals and companies and invest these resources into diversified portfolio of stocks, bonds and other money market instruments. Open-ended mutual funds continuously allow shareholders to sell (redeem) outstanding shares, and investors to buy new shares at any time. The advantage of investing in mutual funds is that it allows small investors like us to invest in financial securities and diversify risk at the same time. Mutual funds take advantage of lower transaction costs when they buy large blocks of financial securities. Mutual Funds are priced based on Net Asset Value (NAV). The total amount invested in the mutual fund by all investors is divided by total number of mutual fund units to get NAV. When you invest money into a mutual fund, according to the NAV, fund units are bought.

Mutual Funds come in various forms. You can either invest a lump sum amount of money in a mutual fund or you can invest small amounts every month. This is called Systematic Investment Plan (SIP) which involves a small amount (as small as Rs 500) being invested in the mutual fund every month. Thus, one can ensure that NAV balances out. SIP is similar to a recurring deposit with the bank or post office. The only difference is that money invested goes into mutual funds. Since the money is directly deducted from your bank at your chosen date, you don't need to worry about savings.

Mutual funds carry lower risk than shares but fetch better returns than bonds. There is no maturity period and you can opt out of it any time you like. Mutual fund seems to be a very effective investment tool for household investors like us. Click here to know more.