Stocks Investments
An Introduction into investing in stocks and shares:
From rags to riches, the fantasy world encapsulated in the hearts of many men as the overnight solution to their middle class lives transformed into a life of their dreamsone wonders is it what the share market and investing in stocks are all about. Maybe not, it is a world where risks, calculations and keen foresight seem to be the order of the day. The stocks are not just stray pieces of paper, it is the very token through which a person assumes his share in a company and his ownership on the companys assets. The shareholding is done collectively and depending on the amount of holding the person determines his share on the company earnings.
To understand the market, the different segregations can be done in company sizes,(measured by market capitalization), sector and types of growth patterns.
Many investors might like to address in terms of large-cap vs. small- cap stocks, energy vs. technology stocks, or growth vs. value stocks. Various factors determine the prices of stocks. Over a relatively short term, how the market will perform depends on, enthusiasm, fear, rumors and news. However, during the long term, whether the prices of stocks will go up or down or sideways is determined by the revenue earned by the company.
One can lay a contention that stocks are a good option to save money for long term goals like retirement. It is also the best shot to getting a return over and above the pace of inflation. From 1926, the returns from large stocks have been more than 10 percent a year. It is interesting to note that a good stock can do well even when the market is relatively down, whereas, a stinker can really put you in trouble even when the market is booming .To determine whether the stocks of a company will do well or not is a tricky proposition. While if the stocks of a company assessed according to the companys future earnings are thought to be doing well, that cannot be taken as the unfaltering verdict. The best companies have also been known to slip. The value of a stock is determined by the companys potential earning. While a stock costing 50 dollars might be cheap considering that the company has a potential to generate extensive revenue, a 2 dollar value of stock might be quite expensive if the future earning potential of the company is dim.
The assessment of stocks regarding its value takes place by comparing to several other factors. The price of the stock is compared to the revenue, earnings, cash flow and many other fundamental aspects. A companys performance is also judged by comparing it to its industry. The companies in slow growth industries have different parameters of evaluation than the ones in more proliferating sectors. Having said this, it would be prudent for investors to consider investing in stocks from different, in which case even if one industry suffers there will always be something to fall back on. For the investor it would be prudent to hold on to a few good stocks than to get involved in rapid fire trading. The cost of trading has dropped dramatically its easy to find commission for less than $10 a trade. Yet there might be other hidden costs as mark up by brokers, higher taxes for short term trade. It is also an imperative in active trading to keep an extremely close vigil on the stock price fluctuation up to maybe every minute.
People investing in stocks can be categorized into two: the savers and the investors. They have different agendas to fulfill. Typically savers are people who will need that money in three to five years. Therefore, stocks are not an appropriate security for a saving purpose. People who invest in stocks need a long time frame for their investment objectives. Over the long haul, stocks have outperformed other investment options by a wide margin. Because of the high volatility of stock prices one should not have any money in stocks that he might need to use in the next three to five years time.
There are several risks associated with investing in stocks. Market risk, business risk, and financial risk are all part of owning stocks. Although you assume risks in owning stocks the potential gain is also very high in stocks. The potential growth is obtained through changes in the price of a share of stock. If the stock increases in value, the investors make money when the stock is sold at a higher price and makes a capital gain. If the stocks are sold at a time when the prices have gone down the investor can also lose money, this change of market price of stocks is considered market risk. Beta is the measurement of market risk, the greater the Beta over 1, the greater the risk of price changes. For Beta less than 1 there are fewer chances of fluctuations in share prices. Other types of risks associated with stocks are business risk and financial risk. These risks are associated with the type of company at hand and the companys potential to generate revenue. These risks can be avoided by potential investors by diversifying their investments into a wide variety of sectors. The logic being that with such diverse investments the risk of the total investment is not just restricted to the performance of one single industry. The performances of different industries are in a different manner contingent on how the economy is doing. For instance during economic recession, the large cost items (housing, large machinery), do not do as well as during economic expansion.
Companies come in various sizes and that can be determined by the assets listed by the companies in their financial statement. However, small companies have a higher growth potential but their risk factor also remain at a high level. In that light the risk associated with the large companies is relatively small because the prices of stocks are relatively stable. The bigger companies are also likely to pay more dividend than the smaller ones.
Investment agendas and motives of different companies might be different: they maybe growth, or aggressive growth, value, or income. Companies targeting growth and aggressive growth will result in higher profits and therefore higher share prices. The value companies might be at a downturn but their future prospects look good and therefore, their share prices are marked at a lesser value than usual. Income stocks pay higher dividends but there is no certainty that these dividends will continue.
The eternal dilemma that plagues an investor is which stock to buy. The frequently reported price earning ratio by the newspapers might be worth looking at. This is the ratio determined on the price per share of an individual stock, and the earnings the company makes on a per share basis. However, to compare the price earning ratio the companies need to be in comparable industries so it would be foolish to compare the price/ earning ratio of healthcare companies to technology companies.
Finally, investing in stocks is a growth related endeavor .a man is always poorer by his needs, but that is not the only motive by which stocks should be dealt with, while considering by stocks it is advisable to do the adequate background study and invest intelligently to see your wealth proliferate. Helpful websites to consider would be www.aesc.org and www.investing.rutgers.edu.
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