10 Questions to Ask

Safety Net: 10 Questions to Ask

WANT TO MAKE SURE YOUR FAMILY is adequately protected against financial disaster? Try grappling with these 10 questions:

1.    What’s the minimum dollar amount you need each month to keep your household running? That’s a useful number to know if you’re forced to slash living costs because, say, you lost your job or you need to cover a large, unexpected medical bill.

2.    How would you cope financially if you were out of work for six months? Think about where you would get the money to cover household expenses—and whether you ought to cut living costs, build up your emergency fund and open a home-equity line of credit.

3.    If you’re retired, should you bother with a separate emergency fund? The big financial emergency is getting laid off—and that isn’t a risk once you’re retired.

4.    Who would suffer financially if you died tomorrow? If you’re single with no children at home, or you’re married to somebody with a healthy income, the answer may be no one. But if you’re the main breadwinner, with a spouse at home and young children, your death could wreak financial havoc—and you may need substantial amounts of life insurance.

5.    Do you own the right sort of life insurance? A majority of policies sold are cash-value policies, which involve hefty premiums—and which can crimp your ability to fund superior investment vehicles, such as your employer’s 401(k) plan. A better strategy: Max out your 401(k)—and protect your family with low-cost term insurance.

6.    Would your homeowner’s policy pay enough to allow you to rebuild? Rebuilding may prove surprisingly expensive, because your new home would need to meet current building codes.

7.    If you required nursing home care, how would you cover the cost? Can you afford to pay out of pocket, should you buy long-term-care insurance, or are you planning to deplete your assets and then fall back on Medicaid?

8.    To reduce premiums, should you raise the deductibles on your health, homeowner’s and auto policies, and also extend the elimination period on your long-term-care and disability insurance?

9.    Thanks to your growing wealth, could you afford to drop various insurance policies and instead self-insure? If you have more than $1 million in investable assets, you might have enough socked away to handle life’s financial disasters without help from life, disability and long-term-care insurance.

10. Which of your assets would be protected if you got slapped with a lawsuit or had to file bankruptcy? Federal law would likely protect much or all of your retirement account money. But what additional protections are offered by state law?

Happy Investing

7 avenues to help you save tax under Section 80C of Income Tax Act

7 avenues to help you save tax under Section 80C of Income Tax Act
Tax-saving investment made during a particular financial year can be claimed as deduction under Section 80C for that particular financial year only.


A plethora of tax saving solutions present in the financial market can help you save your tax. As an investor, you should only know which solution is best for you to make the investment to save tax and achieve your financial goal successfully.


Every year you can invest Rs 1.5 lakh in any of the tax savings solutions and claim tax benefit under Section 80C of Income Tax Act. If you fall in the 30% tax bracket, which is the highest tax slab, by investing Rs 1.5 lakh you can save tax for up to Rs 46,350 (Inclusive of cess charges.). The tax-saving investment made during a particular financial year can be claimed as a deduction under Section 80C for that particular financial year only.


For example, if you invested Rs 1.5 lakh in lump-sum in January 2018 in any tax-saving funds, the same amount can be claimed for financial year 2017-18. Similarly, if you invest the same amount in April 2018, the amount can be claimed for financial year 2018-19.


Here are seven tax savings solutions which can help you save tax by investing Rs 1.5 lakh and claiming deduction under section 80C of income tax act:


Equity Linked Savings Scheme (ELSS)
Apart from saving taxes, investing in ELSS mutual funds will give you capital appreciation and also help you in fulfilling your desired long-term financial goal. The schemes under ELSS category has the least lock-in period of 3 years only. The returns are market-linked and vary from scheme to scheme. The schemes are also designed as per the asset classes, therefore, an investor once assessing their own risk profile and taking help from a financial adviser should invest in any kind of such schemes.


Bank Fixed Deposits (Bank FD)

A bank FD taken for a term of 5 years is only eligible for tax saving. Apart from this, banks FD provides safe and guaranteed return. Despite the interest earned is taxable, FDs can serve as a good tax-savings instrument over normal savings account where the interest rates are very low.


Public Provident Fund (PPF)

If you want to accumulate funds for your retirement, PPF serves as one of the best investment avenues. Investing in PPF will give you Exempt-Exempt-Exempt (E-E-E) benefit. This avenue has the highest lock-in period of 15 years among tax saving avenues. It is also one of the safest options for any individual to park their money, as the investment made under PPF account is not seized by any court. The returns are fixed and guaranteed but subject to change on a quarterly basis.


Life Insurance (LI)

Mainly bought for the purpose of protecting one's family. One can save tax under Section 80C as well as under section 10(10) D where maturity benefits also get exempt from income tax. A product like ULIP help in providing protection and investment growth and can be made particular goals.


National Pension System (NPS)

The instrument is designed to get a lump-sum amount and also, a regular income once you retire. This gives you an additional benefit of doing the investment of Rs 50,000 under section 80CCD (1B) of income tax act. It means any eligible individual can invest up to Rs 2 lakh under his/her NPS account and save tax for up to Rs 61800 (inclusive of cess. charges) in the highest tax bracket. Deferred annuity received during the time of retirement is taxable.


National Savings Certificate (NSC)

Investment in the scheme is eligible for tax deduction. There is no limit to making your investment. Also, the certificate can be kept as collateral security to avail loan from banks.


Senior Citizen Saving Scheme (SCSS)

It one of the best tax saving solution for senior citizens, who have reached age 60. If an employee is taking VRS (Voluntary retirement) then he/she can open their SCSS account even the age 55 provided that the account is opened with a month of the date of receipt to avail retirement benefits. The maturity cycle is 5 years and it can be further extended for a period of 3 years if needed.

Investment	Lock-in Period	Historical Returns	Offers Guaranteed Returns	Tax free Return
ELSS	3	12-16%	No	Yes
Bank FD	5	7-9%	Yes	No
PPF	15	7.80%	Yes	Yes
Insurance	5	0-6.5%	No	Yes
NSC	5	7.80%	Yes	No
NPS	10	9%	No	No
SCSS	5	8.30%	Yes	No

Happy Investing

Tips for a fresher to start investing in stocks

Tips for a fresher to start investing in stocks


Equity Trading is not a game. When you start reading and learning about it, you will see that it is a profession in itself. Before investing, an individual needs to know a few basics and risks associated with it. This has to be done before you start to trade on real time stock markets.


This requirement of knowledge about stocks and stock markets make it seem like a daunting task for beginners. Here are 6 tips to give you a better idea about stock markets and get you started on this investment journey:


Don’t Invest Your Savings: Stock markets are known to be high-risk investments where there is no guarantee of receiving your principal investment back. Hence, it is wise to not get sucked into the lure of higher returns. It is advised to invest in the stock market only once you have other savings that are more secure. Having fairly secured your future, you can then afford risks and make a move towards the stock market.


Maintain Investment Discipline: Fluctuations in prices are nothing new within the stock market. This volatility in the market has sometimes caused the investor to lose their money. Also, timing the market in such conditions becomes a tough task. To avoid losing your money one can adopt a disciplined approach towards investing. Systematic Investment Plans (SIPs) are one way of doing so. When you have discipline and patience in monitoring your portfolio, chances of generating great returns become brighter.



Manage Risk & Money Wisely: As an Investor, you cannot control the market but surely you can manage your money in every transaction you make. Even if you have a good trading strategy it can be all for nothing.You need to have money left in your investment as well.One of the best technique of managing your invested money is by using the stop loss tool.

 When the threshold value of your investment reaches between 5-15% the stop loss tool will automatically trigger an order.This order will release the investment and avoid further loss.



Hold Diversified Portfolio: The stock market is filled with companies from various sectors and fields offering many services. Diversify your stocks into different industries. This way if one industry of your investment is down performing, another might shoot up. You should focus on stocks of reputed companies that offer more guaranteed returns. However, keep a few stocks of newer companies that you trust to grow. This way you can maximise your profits with their future growth.



Keep a Long-Term Goal: Stock markets are volatile in the short term but over the long term period they are less risky and offer better overall returns. Holding stocks for a longer time period is more likely to get you great returns. Hence, it is better to invest in stocks with a long term view rather than a short term one.It is a good idea to lock in money which you won’t be needing in the near future.This way if you sell the stocks when the prices are down you may lose money at the start but over the years the stocks tend to catch up.



Remember a Stock is a Company: No matter whether you earn or lose it is important to remember the basic idea behind this investment.You are investing in a company that you trust and hope will grow in future. Hence, do not get caughtthinking of stocks as a game or gamble.Your money is invested in a real company, where real work has to be done for your investment to grow.It is, therefore, important for you to find out all you can about the company and find a right estimate of its future potential.


You should also consider whether these goals align with your own investment goals.




Happy Investing

Children’s Day: How to groom your child to be financially literate

Children’s Day: How to groom your child to be financially literate

Most parents might touch on the concept of piggy banks and savings early on, but are usually reluctant to discuss the topic of money and family finances with their children.

I like this quote by American columnist Bob Talbert: “Teaching kids to count is fine but teaching them what counts is best.” The quote is pithy but it gets to the core of teaching fiscal responsibility.

What parents forget

If you look around, parents and teachers focus a lot on teaching mathematics—they send kids to Vedic Maths and Abacus classes to enable them to have numbers at their fingertips from a young age.

Parents also enroll their kids in drama, dance, singing, karate and other classes. But how many of us actually remember that when our kids enter the real world, the first thing they will confront is money?

Amidst all the classes, we forget an important life skill—financial literacy. Many of us probably pay our children pocket money but we don’t realise that this is not teaching them about the value of money or how to manage it. Some schools touch upon economics or basic finance courses, however, no school is equipped to analytically teach financial literacy to your kids.

What exactly is financial literacy?

It means understanding:

• Income, expenses and savings
• Budgets
• Assets—real and financial—and liabilities
• Risk management, insurance and its purpose
• Investments and how to make money work for you
• Taxation

How to handle situations such as disability, starting a business, inheritance, Wills, trusts, and inter-generational wealth transfer.

Money lessons at home

Most parents might touch on the concept of piggy banks and savings early on, but are usually reluctant to discuss the topic of money and family finances with their children.

In the Indian context, money is a touchy issue and in terms of discussing sensitive topics, ranks as high as sex education. Thus, it’s not surprising that most parents are loath to discussing it.

The earlier the better

The best way to teach kids about money is to let them deal with money early on. This is because as kids grow into teenagers they develop strong habits, which become hardwired because of peer pressure and the external environment.

This particularly happens beyond the 6th grade, when children face severe peer pressure. They want to buy gadgets, branded clothes and do many things that their friends are doing. Telling them to act sensibly and responsibly at this age might be a tall order if you have not inculcated good habits early on.

They need to understand the power of money and the consequences of their decisions. It’s far better that they commit mistakes at a young age with smaller amounts than commit financial blunders when they grow up. They will thus experience handling their own money and making decisions around it. I believe this is a strong competitive edge that you can give your children for their future financial success.

When’s a good time?

In my experience, kids between the age of 5 and 12 are receptive to financial literacy. Hence, it is best to start between 5 – 12 years of age. This is not to say that children above 12 do not appreciate financial literacy.

They certainly do, when the content is interesting, but it takes a little more time for them to understand the importance because they develop certain habits and are consumers by then. There will be constant demands, or emotional blackmail that most parents will be exposed to at some point of time.

You must understand that it’s natural for them to sometimes behave like this and is a part of growing up. The best part is that you can still teach them to be savvy savers, spenders, investors and givers.

Money lessons for kids

Common sense and some practical ideas is all you need to have to start teaching your children about money. The key learning points for kids should be:

• Having healthy values about money
• Setting goals and priorities
• Thinking and making prudent choices
• Not living for the weekend: delay instant gratification
• Understanding the virtues of hard work.

The ‘how’ part

There are often many real-life situations when you can teach your kids about money, considering that money is an integral part of our daily life.

Any time: Whenever you buy groceries or petrol or even pay school fees, you can teach children. If you have taken your son to an ATM, and he insists on pressing all the buttons like most kids, take this opportunity to discuss a few points about ATMs.

Special time: You can always set aside time to teach them the basics of money management. If you cannot, then you must seek professional help. It is far better to spend some money on financial education than allowing your children to develop irresponsible and dangerous money attitudes, behaviours and habits.

Finally, it is the parent’s responsibility to control what children buy and how much they spend. If parents fail in this critical test, no amount of money will be enough for their kids to spend when they grow up.



We must realise that it is our mistake when we rush off to dress them in so-called designer outfits or spend several lakhs or thousands on their birthday parties without giving an iota of thought on the impact this has on the children’s minds.



Don’t forget that even though you might not be teaching your kids directly, they are constantly learning by just observing you.




Happy Investing
Source:Moneycontrol.com
 

How to invest in equity mutual funds without risking your capital

How to invest in equity mutual funds without risking your capital



For the Investor who wants to play safe with his capital and take advantage of equity overtime .... like pensioners.

The dividends announced by the source scheme will be transferred to transferee scheme at regular intervals.


Search for high returns make individuals consider investments in stocks. But they bring in ‘high risk’ to the table. Many senior citizens and low risk investors are looking to invest in stocks and equity mutual funds for high returns given low returns offered by traditional fixed income options such as bonds and fixed deposits. But the thought of losing one’s capital is a big deterrent. Here is how you can invest in equity funds without losing your capital.


You are just going to use an existing facility offered by many mutual fund houses – dividend transfer plan. The facility allows you to invest the dividends declared by one mutual fund scheme into another scheme. What you just have to do is to invest your money in an arbitrage fund’s dividend option and opt for a dividend transfer plan. The transferee scheme should be a diversified equity fund. This arrangement of transferring dividends to an equity mutual fund scheme allows you to invest in equity mutual funds without risking your capital. Even if stock markets tumble your capital remains safe and You may take a hit only on the dividends invested in equity mutual fund.


Let’s us look into the details of this arrangement to understand how it works in your favour.


For the beginners, arbitrage fund manager buys a share in cash market and simultaneously sells equal number of shares in futures. The fund manager does not take any risk pertaining to stock markets. The aim is to lock in the price deferential to generate returns for the investor without risking capital. The returns generated are in line with money market returns. Though the scheme generates returns like a bond fund, the scheme is treated as an equity mutual fund for the purpose of taxation.


Arbitrage funds make good source scheme for dividend transfer plan as they distribute most of their profits by way of dividends as there is no tax on dividend.


As and when the scheme declares dividends the proceeds are invested in the scheme you have chosen. However there are couple of points you should keep in mind. First the amount of dividends if not more than a threshold then the same is reinvested in the source scheme. For example, most mutual fund schemes put this threshold at Rs 500. Your corpus invested in the arbitrage fund should be adequate to generate a dividend more than this threshold in each payout. To ensure that the payouts are more than the prescribed threshold, you may choose to invest in quarterly or bi-monthly dividend options instead of monthly dividend option.


Second factor is minimum investment norm of the transferee scheme. Unless the fund house waives it, the investor has to abide by this norm. In most open-ended diversified equity fund this amount stands at Rs 5000. If the initial dividend is not more than this minimum threshold, then the investor have to invest from his capital for the first time.


If both these norms are taken care of, the dividends announced by the source scheme will be transferred to transferee scheme at regular intervals. Please note both the dividend amount and the frequency of dividend are not guaranteed by mutual funds.


Arbitrage funds as a category have delivered 1.4% returns over past three months. Going by the trend one may see approximately 4-5% of the invested capital by way of dividends. This may look very small in the absolute terms. But look at it as a systematic investment plan with three year time frame and you will gradually build your equity mutual fund portfolio over time.


The returns depend on the arbitrage opportunities available. Given the liquidity gush in financial markets and falling interest rates the returns are expected to remain tepid from these categories of funds. If the situation persists, over three year period one may see around 10% to 12% of his money getting invested in diversified equity fund.




Happy Investing

A Big Boon for Cyberabad and Uttar Pradesh should it decide to capitalize

A Big Boon for Cyberabad and Uttar Pradesh should it decide to capitalize


Did Karnataka govt shoot itself in the leg by clearing the IT union?



Just when the Information Technology (IT) space was still grappling with the downtrend and visa problems the Karnataka government has decided to stir up the sector and, it became the first state to recognise trade union in the IT sector.


Reports say that the state has recognised the Karnataka State IT/ITeS Employees Union (KITU) as a workers’ body to protect their interests.


Recently, a slowdown in their customer countries and structural technological changes have led to the sacking of employees, especially at the middle level. The high priced middle-level employees were replaced by cheaper fresh candidates. Though it made business sense to replace high-cost employees with lower cost ones, especially if there was not much difference in their skill sets, questions were been raised in the manner in which they were sacked.


There is no question that the unfair manner in which employees have been sacked needs to be corrected, but will unionization help?


One of the reasons why IT sector employees are treated better than those in other sectors is because employees and their knowledge base is the key raw material in the sector. Regular skill upgrades are encouraged so that both the employee and the company can grow. Improved skill sets with competence in new technologies are showcased by the companies in order to get more high-end work.


An employee union will only result in spoiling their relationship with management. There is any case a very thin line between employees and management in the IT sector. Further, the development comes at the worst possible time for the Indian IT sector which is still struggling to find their mojo.


One of the main reasons that India has become an IT hub is that of access to low-cost skilled manpower. It is a labour arbitrage game. Any increase in labour costs, in a scenario where the market is shrinking, will only result in the company shifting its base to some other state or country.


Cyberabad, the term coined for the IT SEZ in Hyderabad, the dream project of then CM did take off well but could not compete with Bangalore in becoming the Cyber Capital of India. But things are likely to change soon. With the approval of unionization of the IT workforce the companies may decide to shift there base. Off course Bangalore may still remain one of the IT Hubs but the companies are likely to leave the low end jobs there and shift there main workforce to other states providing a more favorable and conducive atmosphere.


Uttar Pradesh, with such a large population has been struggling very hard to convince the IT majors to make UP their abode. Specially so during the regime of Akhilesh Yadav but failed due to the stigma of Goondaraj and large scale corruption associated with the SP Govt.


But now with the dynamic and clean leadership in CM Yoginath, the state is striving hard to woo all the Industry Majors to come to Uttar Pradesh. This also has the backing of Prime Minister Narendra Modi. UP being the largest state of the country has a critical bearing on all National political outcomes and BJP govt with absolute majority is trying it's best to clean the arena and woo industrial partnership to provide better employment opportunities to the large population. UP holds the unique distinction of holding one of the best technical, medical, business etc schools in the country. However due to lack of opportunity it sees the maximum migration of this intellectual workforce.


The IT Majors looking for an alternative abode would do well to look into the investment opportunities and low cost technically skilled manpower available in Uttar Pradesh. The govt under Yoginath is also going extra steps in providing tax exemptions and other facilities to woo the industry. Can Yoginath use this opportunity to make Lucknow the next IT Hub of India.


Time will only tell. But by approving the unionization of IT workforce the Karnatka govt has definetly shot it's own foot.




Happy Investing

Basic steps to pick a good equity mutual fund scheme

Here are the basic steps to pick a good equity mutual fund scheme


Selecting an equity fund purely on the basis of its ‘star rating’ provided by portals or issuers is not a fool-proof fund selection method

If you are thinking of investing in an equity mutual fund, you might find it difficult to decide which one to choose from within the vast array of funds on offer. It is difficult to figure out which one will do well in the future and give you returns that beat industry peers.

However, if you follow a few basics while choosing the fund, chances are you might end up getting decent returns on your investments.


Here are some important aspects of selecting a good mutual fund scheme:



How to select the best fund

The process of effectively selecting an equity fund to match your requirement starts with a robust assessment of your own risk tolerance and your financial goals.

“It is a 'top-down' process rather than a 'bottom-up' one. For instance, you may be a moderate risk investor looking to start an SIP but your goal may be 15 years away. In such a case, you should explore options within the diversified equity category. Similarly, a risk-loving investor may want to consider a more volatile fund, such as a mid-cap fund, that has the potential to deliver a higher CAGR.”



Where do investors go wrong

A lot of individual investors go ahead and select equity mutual fund schemes for wrong reasons. “For instance, we’ve seen a number of clients rushing into an equity scheme simply based on its one-year return. This more than often ends up backfiring; since short-term performance is usually the result of one or two alpha-generating stock picks, and does not typically extrapolate into the longer-term future.


Similarly, selecting an equity fund purely on the basis of its ‘star rating’ provided by portals or issuers is not a fool-proof fund selection method. Succumbing to media hype created by smartly crafted ad-campaigns is another trap retail investors must watch out for.”


Things to check before parking your money

Having zeroed in on your most suitable fund category, you now need to select a fund within that space. As a thumb rule, go for a fund that has a strong vintage, and a track record of having navigated at least three complete market cycles.

An investor should evaluate how the fund management team reacted during tumultuous market phases, such as during the global financial crisis of 2008.

 “Check whether the fund is 'true to label' or capriciously chases momentum bets. Evaluate its 3-year, 5-year, and 10-year return vis-à-vis its category. Lastly, spare a moment to assess the fund manager at the helm. Chances are, he or she will need to maturely navigate more than one bear market during your investment tenure!

“Avoid funds that are managed by greenhorn ‘whiz kids’, irrespective of the impressiveness of their academic credentials”.

There are three simple filters that can help you make a good decision.

Company background: The investor should check the credentials of the promoters of the mutual fund company. Established and professional companies have sound policies and investment experience to ensure your money is safe and also well positioned to benefit from market movements.

Portfolio/Fund Manager: The fund manager's track record and his ability to navigate market cycles successfully over long time periods is a great factor that one should study.

The objective of the fund: Check on the ability of the fund sticking to the investment objective mandate. Avoid a fund which has frequent shifts to the overall theme or allocations.


There are many who fall for the obvious past performance formula. There’s always a more intelligent option, it’s best to contact your advisor or mutual fund distributor to make an informed decision.




Happy Investing
Source:Moneycontrol.com

Post Office Monthly Income Scheme for retirement

Why you should consider Post Office Monthly Income Scheme for retirement

With POMIS, senior citizens can safeguard themselves from re-investment risk for a lock-in period of 5 years.

Out of the wide variety of scheme present for you to invest towards your retirement planning, Post Office monthly income scheme (PO-MIS) can be one of the best instrument to invest for your retirement. As the name suggests, it means that any individual investor who needs regular income can park their money in such scheme.

 

With SBI slashing senior citizen FD rates to 6.75%, the Post Office MIS (POMIS), at 7.5%, still has an edge of 75 bps over instruments of comparable risk. With the POMIS, senior citizens can safeguard themselves from re-investment risk for a 5 year period, as the rate gets locked in. “The higher than FD rates, coupled with the sovereign guarantee, makes POMIS worthy of consideration for risk-averse senior citizens”.

 

Here are eight important features you should know about POMIS scheme:

•  POMIS account can be opened by resident individual especially suitable for retired employees or senior citizen whereas NRI and HUF cannot open the account.
• One can make a minimum investment of Rs 1500 which can be increased in same multiples thereafter.
• Maximum deposit of Rs 4.5 lakh can be made in single account while in case of joint account maximum investment can go up to Rs 9 lakh.
• The investment made by an individual cannot be claimed under section 80 C of income tax act.
• Account for the minor can be opened in the name of a guardian where the limit for depositing the money is capped at Rs 3 lakh.
• Premature closure of an account is possible after 1 years where one will be charged for up to 1% to 2% of deduction on deposit as per the pre-mature withdrawal made after the completion of 3 years or before the completion of 3 years respectively. However, no deduction is made in case of death.
• There is a provision of auto credit facility available where interest to a savings account can be transferred directly. The interest income is taxable under the head “Income from other sources” of the income tax act.
• No bonus is paid if the investment is made on or after December 1, 2011, and also no TDS is deducted at the time of maturity.
• The monthly interest can be either collected directly from the post office or transferred to a bank or post office savings account. The monthly interest can also be invested in a recurring deposit or a SIP, earning you even more interest. Though the tax benefits are few, the versatility of the product, the flexibility it offers, and the dependable monthly income it offers makes it an attractive product for retirees”.

Here are few things you require to open an MIS account in Post Office

You need to have a copy of the following documents ready before opening a POMIS account at your nearest location.

=>Two passport size photographs

=>Address proof and identity proof which can be your Aadhaar card, voter ID, ration card, PAN card, a valid passport, driving license, etc. You should not forget to carry the original identity proof for verification purpose as mentioned thereon.

Also, while filling up the form carefully, you should not forget to provide the nominee details. And once the procedure is completed, deposit your money to get the regular income out of it.

Happy Investing

Stocks Basics: Conclusion

Stocks Basics: Conclusion

 

Let’s recap some of the main points we’ve learned in this tutorial:

• Stocks are claims to a company’s profit stream and are granted voting rights in installing its board of directors or in approving large corporate actions such as being acquired. Shareholders are not owners of a corporation’s assets and do not involve themselves with corporate management.
• Stock is equity, bonds are debt. Bondholders are guaranteed a return on their investment and have a higher claim in recovery from a bankruptcy than shareholders. This is generally why stocks are considered riskier investments and require a higher expected rate of return.
• You can lose all of your investment with stocks. The flip-side of this is you can make a lot of money if you invest in the right company.
• The two main types of stock are common and preferred. It is also possible for a company to create different classes of stock.
• Stock markets are places where buyers and sellers of stock meet to trade. Most trading takes place today via electronic trading.
• Stock market indexes give an overview to how the stock market is “doing.”
• Stock prices change moment to moment according to supply and demand. There are many factors influencing prices, the most important of which is expectations about earnings. Still, there is no consensus as to why stock prices move the way they do.
• To buy stocks you can either use a brokerage or a dividend reinvestment plan (DRIP).
• There are a number of different order types, and the type of order you use will depend on whether you are more concerned with price or with completing your order.
• Stock tables/quotes actually aren't that hard to read once you know what everything stands for!
• Bulls are optimistic and bull markets are defined by increasing stock prices. Bears are pessimists and bear markets occur when prices fall.

Happy Investing

Source:Investopedia.com

Stocks Basics: Valueing Stocks

Stocks Basics: Valueing Stocks

 
Stock prices change often (sometimes many times a minute) as the result of market forces. By this we mean that share prices change because of fluctuations in their supply and demand. If more people want to buy a stock at a given moment (demand) than sell it (supply), then the price moves up. In our previous example of buying Apple Inc. (AAPL) stock with a market order, the purchase caused the price to increase to $140.05. Conversely, if more people are motivated to sell a stock than buy it, there would be greater supply than demand, and the price would fall. Of course, for any trade to actually happen there needs to be exactly one buyer and one seller – so the number of buyers and sellers is technically the same. What we mean here is the number of motivated buyers or sellers, i.e. those that are willing to buy for higher or sell for lower.

The price of a stock represents the “value” of the corporation. At its most basic level, this value is computed by dividing the dollar value of the company, known as the market capitalization (or “market cap”) by the number of shares outstanding. For example, if XYZ Corp. is valued at $1,000,000 and it has 100,000 shares outstanding, the price of each share is $10.00. Working backwards, one can determine the market value of a company thus by multiplying the share price by the number of shares. The question then becomes what causes fluctuations in the value of the corporation?

But what does a company’s value represent? A company has stuff and it sells stuff. The stuff it has – buildings, machinery, patents, money in the bank, etc. – constitute its book value, or the amount of money a company would get if they sold all that stuff at once. But companies are primarily in business of trying to make a profit, and in doing so they earn cash by selling products or services, so the total value of a company has to do with the stuff it owns now and the cash flows it will receive in the future. The value of the stuff it owns now is fairly easy to determine, but the value of all the future cash flow streams is a bit trickier to nail down – and it is this piece that is responsible for market gyrations.

Because of the time value of money, profits to be earned in the future must be discounted back to represent today’s dollars – just as a dollar put into a bank account today will be worth more in the future after it has earned some interest, but in reverse. How much to discount these future cash flows depends on a lot of things including the cost of capital (which is the cost to borrow or find investment, and this depends on interest rates), the riskiness of the business (in the stock market this is often estimated using beta), and the foregone cost of doing nothing and keeping your money in the bank (the opportunity cost or risk-free rate).

Once an appropriate discount rate has been estimated, the hard part is to figure out what future cash flows will be – a month from now, a year from now, five years from now. Sentiment and expectations are a big component of these predictions, and financial analysts try to figure these amounts out in a number of ways accounting for both company-specific factors and macro factors such as overall economic health. Fortunately, the stock market reflects the expectation of future cash flows in an easy to compute ratio of price-to-earnings, also known as the P/E ratio. A P/E ratio of 10x means that a company is being valued today at 10x its current earnings. A P/E ratio of 20x for the same company would mean that given the same amount of earnings, the market is giving it twice as much value, indicating that those future cash flows are going to be larger. Of course, there are a number of sophisticated pricing models that analysts can use in addition, or instead of, the P/E ratio such as using dividend discount models or free cash flow models.

Because the future is unknown today, various peoples’ estimates will be different from one another, giving some a higher expected stock price and some a lower stock price. If the current price is lower than their expected price, people will buy it. If it is higher, people will sell it. When an economy is growing, people are spending and profits are rising. Companies invest in projects, expand their businesses and hire more people. Investors are optimistic and expectations of future cash flows rise, and stocks enter a bull market. Simply put, stock markets can fall when expectations of future cash flows decrease, making the prices of companies seem too high, therefore causing people to sell shares. If many more people come to this decision than there are people to buy those shares, the price will fall until it reaches a level where people will begin to believe that they are fairly valued.

The important things to grasp about this complicated subject are the following:

1. At the most fundamental level, supply and demand in the market determines stock price in any given moment.

2. Price times the number of shares outstanding (market capitalization) is the value of a company. Comparing just the share price of two companies is meaningless.

3. Theoretically, earnings are what affect investors' valuation of a company, but there are other indicators that investors use to predict stock price. It is investors' sentiments, attitudes and expectations that ultimately affect stock prices.

4. There are many competing theories that try to explain the way stock prices move the way they do. Unfortunately, there is no one theory that can explain everything.






Happy Investing
Source:Investopedia.com

Stocks Basics: How to read a Stock table/Quote

Stocks Basics: How to read a Stock table/Quote



Any financial paper has stock quotes that will look something like the image below:



Columns 1 & 2: 52-Week High and Low - These are the highest and lowest prices at which a stock has traded over the previous 52 weeks (one year). This typically does not include the previous day's trading.

Column 3: Company Name & Type of Stock - This column lists the name of the company. If there are no special symbols or letters following the name, it is common stock. Different symbols imply different classes of shares. For example, "pf" means the shares are preferred stock.

Column 4: Ticker Symbol - This is the unique alphabetic name which identifies the stock. If you watch financial TV, you have seen the ticker tape move across the screen, quoting the latest prices alongside this symbol. If you are looking for stock quotes online, you always search for a company by the ticker symbol. If you don't know what a particular company's ticker is you can search for it on our markets page.

Column 5: Dividend Per Share - This indicates the annual dividend payment per share. If this space is blank, the company does not currently pay out dividends.

Column 6: Dividend Yield - The percentage return on the dividend. Calculated as annual dividends per share divided by price per share.

Column 7: Price/Earnings Ratio - This is calculated by dividing the current stock price by earnings per share from the last four quarters.

Column 8: Trading Volume - This figure shows the total number of shares traded for the day, listed in hundreds. To get the actual number traded, add "00" to the end of the number listed.

Column 9 & 10: Day High and Low - This indicates the price range at which the stock has traded at throughout the day. In other words, these are the maximum and the minimum prices that people have paid for the stock.

Column 11: Close - The close is the last trading price recorded when the market closed on the day. If the closing price is up or down more than 5% than the previous day's close, the entire listing for that stock is bold-faced. Keep in mind, you are not guaranteed to get this price if you buy the stock the next day because the price is constantly changing (even after the exchange is closed for the day). The close is merely an indicator of past performance and except in extreme circumstances serves as a ballpark of what you should expect to pay.

Column 12: Net Change - This is the dollar value change in the stock price from the previous day's closing price. When you hear about a stock being "up for the day," it means the net change was positive.

Quotes on the Internet
Nowadays, it's far more convenient for most to get stock quotes off the Internet. This method is superior because most sites update throughout the day and give you more information, news, charting, research, etc.


To get quotes, simply enter the ticker symbol into the quote box of any major financial site like Yahoo! Finance, CBS Marketwatch, or MSN Money. The example below shows a quote for Microsoft (MSFT) from Yahoo Finance. Interpreting the data is exactly the same as with the newspaper.








Happy Investing
Source:Investopedia.com