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Investing in Stock Markets Research Team | Posted On Tuesday, October 21,2014, 11:18 AM

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Investing in Stock Markets



Does stock market investing involve just randomly picking up stocks in the market or is there a method in madness. You work in a pharmaceutical Company. Do you pick up stocks just because you work for that Company or prefer the pharmaceutical sector?

Remember : Investing in the stock markets without doing your research is like playing stud poker and never looking at the cards. - Peter Lynch.

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Why Do You Invest in The Stock Market?

Your needs for investing in the stock market might be different from that of your neighbor. Know your goals before investing in the stock market. If your goal is to buy a car in the next year then you need to pick up aggressive growth oriented stocks. Your neighbor might be planning for his retirement and he would purchase stocks which give good dividends and not growth stocks.

See Also: What is Primary Market?

Different Needs ... Different Stocks ...

How Do You Pick Up Growth Stocks?

Growth Oriented Stocks
These stocks invest their profits back into the business to fund growth and expansion. They grow fast aggressively expanding and taking over other Companies. In a bull market these shares rise very fast and give good profits.

Stocks in the infrastructure sector might be a good bet. Also look at supporting stocks. Cement stocks would do well when the infrastructure/construction sector does well as cement is required in the construction industry.

Auto Industry
The auto industry (Cars and Motorbikes) tends to do well during festivals like Diwali as you would buy a car on this auspicious occasion and auto Companies give a good discount at this time. Look out for good auto ancillary Companies (Suppliers to the auto industry) who make parts for cars and bikes as well as support functions such as Batteries, Tyres, Engines, Forging, gears , clutch and so on.

If there are good monsoons and a bumper harvest farmers purchase tractors with these profits with an anticipation of a better harvest in the next season. Motorbikes are purchased heavily in rural areas and these two wheeler Companies also do well.

Banks / NBFC
You would avail (Two wheeler/Four wheeler/Commercial vehicle) loans to take advantage of the discounts offered in the festival seasons and banks loan orders grow in these seasons. NBFC sanction loans in the rural areas for the purchase of tractors and motorbikes.

How Can You Make Money in an IPO?

You must be knowing of the IPO (Initial public offer) where Companies list their shares/stock on the stock exchanges (BSE and NSE) for the first time. Companies list their shares on the stock exchange during bull markets with the hope that positive market sentiments will send their share prices soaring.

Stag Investor
If you are a stag investor (You invest only in IPO’s) to make a profit. You will have to purchase a demat account to invest in an IPO.

Investing in an IPO
IPO’s are open for investment only for a fixed time period generally 3-10 days and you have to invest within this time period. You can invest in an IPO where the lower price and the upper price is fixed beforehand called price band. You have to apply for a fixed quantity of shares within this price range within the fixed time period.

If the IPO has a lower price of INR 150 and an upper price of INR 170 then you have to pick a price within this range (INR 150-INR 170) as well as a fixed quantity of shares and apply before the IPO closes. If you and a number of people invest in an IPO then its price would be high (Closer to INR 170).

See Also: Stock Exchanges In India

What Happens if a Number of Investors Invest in an IPO?

Lower Quantity : This might mean you get a lower quantity of shares than you applied for as the quantity of shares is not enough to distribute to all investors.

Higher Price : The price of the IPO called cutoff price would be closer to INR 170 and you would get shares only if you apply for shares at this price rather than say INR 152.

Remember : Always apply for shares in the IPO at a higher price in this case INR 170 rather than INR 150 so that the chances of you getting the shares are high.

After the price of the IPO is decided called Cut off price (based on number of investors who invest) it is listed on the stock exchange. It can be listed at a higher price than the cut off price or at a lower price on the stock exchange. You get a profit if it is listed at a higher price than the cut off price or a loss if it lists at a lower price than the cut off price.

Remember : This is a high risk game where if the demand for this stock is high its price would go up very fast. You can make between 40-80% in a day. The losses are also very high if the IPO fails.

If you want money in your retirement years.....

Dividend Stocks
These stocks have a huge cash pile (Unused money) and return this cash to investors as Dividends. Some Public Sector Union (PSU) banks are known to give good dividends.Investors ask Companies what they use the money for which is invested in them .

If a Company has no use for this money they return it to investors as dividends.These stocks are purchased if you want good dividend income in your retirement years.

How Do You Calculate Dividend Yield of a Company?

Companies give a dividend as a percentage on the face value of the share. A Company with a market price of INR 200 declares a 40% dividend not on the price (Market price) of the share but on the face value of the share.

Dividend Per Share
The face value is INR 10 then a 40% dividend is declared on this face value which is (40% of INR 10) = INR 4 which is the dividend per share.

Dividend Yield
Dividend yield = Dividend per share / Current market price per share.

Dividend Yield = INR 4 / INR 200 = 2 %.

Remember : Higher the dividend yield better is the stock if you are investing for good dividends.

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