+ What is a stock?
Imagine that you own a business. If you were to divide that business up into small pieces and sell those pieces, you would essentially have issued stock. Quite simply, stock is ownership in a company. The money you raise from selling those pieces of your business can be used to build new plants and facilities, pay down debt, or acquire another company. A smart owner will keep at least 51% of the stock, which will allow them to retain control of the day to day activities. Any person or institution that owns over a majority of the stock is called the controlling shareholder. Essentially, this person can do anything they want - right down to firing the CEO.
+ What is a blue chip?:
A blue chip is the nickname for a stock that is thought to be safe, in excellent financial shape and firmly entrenched as a leader in its field. Blue chips generally pay dividends and are favorably regarded by investors. A few examples of blue chips are Wal-Mart, Coca-Cola, Gillette, Berkshire Hathaway and Exxon-Mobile.Blue chip stocks are sometimes referred to as bellwether issues.
+ What is a dividend?
Some stocks, especially blue chips, pay dividends. This means that for every share you own, you are paid a portion of the companys earnings. For example, for every share of AT&T you own, you will get sent $0.15 every year. Most companies pay dividends quarterly (four times a year), meaning at the end of every business quarter, the company will send a check for 1/4 of $0.15 for each share you own. This may not seem like a lot, but when you have built your portfolio up to thousands of shares, and use those dividends to buy more stock in the company, you can make a lot of money over the years.
+ What makes stocks go up and down?
The stock market is essentially a giant auction - only instead of antiques and heirlooms, its ownership in businesses thats up for grabs. Stocks are traded at places called exchanges. At these exchanges, traders buy and sell shares of companies. Generally, the price of a stock is determined by supply and demand. For example, if there are more people wanting to buy a stock than to sell it, the price will be driven up because those shares are rarer and people will pay a higher price for them. On the other hand, if there are a lot of shares for sale and no one is interested in buying them, the price will quickly fall.
Because of this, the market can appear to fluctuate widely. Even if there is nothing wrong with a company, a large shareholder who is trying to sell millions of shares at a time can drive the price of the stock down, simply because there are not enough people interested in buying the stock he is trying to sell.
Because there is no real demand for the company he is selling, he is forced to accept a lower price.
+ What is a stock split?
A stock split is essentially when a company increases the number of shares. For example, if you owned 25 shares of XYZ at $15 per share, and there was a 2-1 stock split, you would then own 50 shares worth $7.50 each. Why do companies issue splits if you still have the same amount of money?
Liquidity. Some companies believe that their stock should be inexpensive so more people can buy it. This creates a condition where more of the companys stock is bought and sold [this is called increased liquidity]. The problem, in theory, is that the increased activity will also leads to bigger gains and drops in the stock, making it more volatile.
Many investors believe splits are a good thing. (Their thinking goes Well, if the stock was at Rs.150, and now its at Rs.75, it has to go back up to where it was!) This is absolutely wrong
+ What is the S&P 500 / Nifty 5/ Dow Jones/ Nasdaq etc. ?
All these are major stock exchange indices. Each index if associated with a stock exchange and it comprises of a shares which arre selected for parameters such as liquidity, size, and industry. A stock market index is a method of measuring a section of the stock market. Many indices are compiled by news or financial services firms and are used to benchmark the performance of portfolios such as mutual funds.Following is a list of major stock market indices which people follow:
1. S&P CNX Nifty (India)
2. BSE Sensitive Index - BSE Sensex(India)
3. SSE Composite (China)
4. Nikkei 225 (Japan)
5. NASDAQ Composite (USA)
6. S&P 500 (USA)
7. Dow Jones Composite Average (USA)
8. Hang Seng Index (Hong Kong)
+ What are penny stocks?
Penny Stocks are any stock that trades below Rs.15-20 per share. Most financial advisors and long-term investors tend to avoid them completely because of the extremely high risk that comes with owning them. They generally tend to fluctuate wildly in price, and although some report spectacular gains in a matter of a few days [or even hours], those who invest in them are generally surprised when they disappear altogether.
Generally, if a stock is trading that low, it is danger of losing its listing with an exchange. When this happens, a company is normally either in very bad financial shape, or on the brink of bankruptcy. Smart investors opt to avoid these.
+ What is a broker and why do I need one?
The first step to building your portfolio is to open a brokerage account. These accounts allow you to purchase stocks, bonds, mutual funds, and other investments by paying professionals to buy or sell the items you tell them to. The fee you pay them is called a commission, and can range from as low as Rs.20 to upwards of several hundred Rupees. The amount depends on the value of the trade. The price difference also arises when you choose between either a discount or traditional broker. Traditional brokerages provide a wider range of services, and have the price tag to match. They serve along the lines of professional money managers and can offer advice as to what investments might be right for you. Discount brokers are companies that tailor to the more self-directed investor; they dont offer advice as to what to put your money into, leaving you to make your own financial decisions and charging you much less than their traditional counterparts.
Some firms, such as Charles Schwab and Merrill Lynch, offer both services to their customers, allowing them to choose between the traditional and discount formats. In opening a new account, the minimum investment can vary, usually ranging from $500-$1,000 (and even lower for IRAs and other retirement and education accounts). Most offer the option of either having an application form sent to you, or allowing you to fill them out online, print them, and mail them in with a check. The process is easy and can be done fairly quickly at almost all financial institutions.
Once you have opened an account, you have the ability to start investing your money. All brokerages give you the option of setting up automatic monthly withdrawals, which will transfer an amount you specify each month from your savings or checking account to your brokerage account. This can be an easy way to start building up your equity; if you dont see it, you wont spend it. Since you wont notice the money that is missing each month, saving will be relatively painless.
+ What is a bond?
A Bond is simply an IOU in which an investor agrees to loan money to a company or government in exchange for a predetermined interest rate. If a business wants to expand, one of its options is to borrow money from individual investors. The company issues bonds at various interest rates and sells them to the public. Investors purchase them with the understanding that the company will pay back their original principal plus any interest that is due by a set date [this is called the maturity].
A bondholder is mailed a check from the company at set intervals [for example, every month] until the loan is paid off.
The interest a bondholder earns depends on the strength of the corporation. For example, a blue chip is more stable and has a lower risk of defaulting on its debt. When companies such as Exxon Mobile, General Electric, etc., issue bonds, they may only pay 7% interest, while a much less stable start-up pays 10%. A general rule of thumb when investing in bonds is the higher the interest rate, the riskier the bond. Who can issue bonds? Governments, municipalities, a variety of institutions, and corporations. Commercial Paper is simply referring to bonds issued by companies.
There are many types of bonds, each having different features and characteristics. A few of the most notable are zero coupon and convertible.
+ What are commodities?
Commodities are objects that come out of the earth such as orange juice, wheat, cattle, gold and oil. People buy and sell commodities based on speculation. For instance, if you thought hurricanes over Latin America were going to destroy much of the coffee crop, you would call your commodity broker and have them purchase as much coffee as possible. If you were correct, the price of coffee would be driven up drastically because the crop had been destroyed by weather, making the surviving harvest worth more.
Almost all commodity speculators trade on margin which results in substantial risk to the invested principal. The odds are heavily against anyone hoping to build permanent wealth in the commodity markets.
+ What are money market accounts?
A money market is more or less a mutual fund that attempts to keep its share price at $1. Professional money managers will take your cash and invest it in government t-bills (aka treasuries), savings bonds, certificates of deposit, and other safe and conservative short term commercial paper. They then turn around and pay you, the owner of the money market, your portion of the interest earned on those investments.
Most banks offer money market accounts to their customers, although the amount of interest paid will vary by account size. Money market accounts are frequently used to park cash between investments.
+ Inflation and what it does to your money!
The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Most countries central banks will try to sustain an inflation rate of 2-3%. Inflation numbers are announced every thursday by the Central Bank. India uses the Wholesale Price Index (WPI) to calculate and then decide the inflation rate in the economy.WPI is the index that is used to measure the change in the average price level of goods traded in wholesale market. In India, a total of 435 commodities data on price level is tracked through WPI which is an indicator of movement in prices of commodities in all trade and transactions.