Chapter 3: Speculations ,rumours at Stock Market

How Stock Market works

This short story is doing the rounds on the Internet.

It was autumn, and the Red Indians on the remote reservation asked their New Chief if the winter was going to be cold or mild. Since he was a Red Indian chief in a modern society, he couldn’t tell what the weather was going to be. Nevertheless, to be on the safe side, he replied to his tribe that the winter was indeed going to be cold and that the members of the village should collect wood to be prepared.

But also being a practical leader, after several days he got an idea. He went to the phone booth, called the Weather Bureau and asked, “Is the coming winter going to be cold?”

“It looks like this winter is going to be quite cold indeed,” the meteorologist responded. So the chief went back to his people and told them to collect even more wood. A week later, he called the weather bureau again. “Is it going to be a very cold winter?” “Yes,” the man replied, “it’s definitely going to be a very cold winter.”

The chief again went back to his people and ordered them to collect every scrap of wood they could find.
Two weeks later, he called the weather bureau again. “Are you absolutely sure that the winter is going to be very cold?” “Absolutely,” the man replied. “It’s going to be one of the coldest winters ever.” “How can you be so sure?” the chief asked. The weatherman replied, “The Red Indians are collecting wood like crazy.”

This is how stock markets work!

Chatper 2 : Risks involved if you invest your money in Stock Market

People say that Stock Markets are the most risky type of Investment. People fear a lot when there is a market crash . They feel that their hard earned money will be lost and they feel that FDs , PPFs , etc are the safest when it comes to investment.

Well if you ask my view on the above I have totally different view. The word "RISK" differs from people to people and money .

Let me elaborate it in detail.

Risk can be divided into 3 major categories :

• High Risk.
  

• Medium Risk.

• Low Risk.

High Risk :-

High risk involves investing your money which gives you very good returns in short time or long time.Investments which yield upto OR more than 100% returns. But the risk is very HIGH and there is no assurance that you will get the returns. There are instances where the money you invested becomes half instead of appreciating . Looks scary right ? I am not trying to scare you but keeping you informed about the worst case scenario. This investment mainly involves investing in Stock Market . People cannot predict stock market and fall prey and loose their money. There are many other investments which are very risky. But I always believe in the rule "HIGH RISK HIGH RETURNS" . No pain , no gain.

Now not everyone can take these types of risk. But I never say that people should avoid investing in stock market completely. I totally disagree with that. Let me tell you why I feel that.
One need not invest lot of money in stock market. They can invest their savings partially.

Now the big question will be how much ?? How much depends on how much you save and how much risk you are willing to take.

Risk taking depends on many factors. Like if you don't have any dependency , no major commitments . Usually bachelors fall in this category. As they are not married they usually dont have major commitments . ofcourse there can be exceptions. But in general bachelors can take lot of risk and try to invest aggressively. Aggressive I don't say that one has to invest 100% of the savings into Stock market. You can divide it proportionally .
Say 40% of Savings in Stock Market . ( High Risk )
40% of Savings in Mutual funds , ULIPs etc. ( Medium Risk)
20% of Savings in FDs, PPFs , Post office etc . ( LOW or no Risk)

There is also an option of going for a really good investment which is Real Estate . This is the best possible investment. esp. in bangalore its best !! But not all people can afford , LOT of Capital is needed. Ofcourse people can take loans etc. But it involves lot of risk , time , knowing the right people,contacts, lot of research about the real estate , whether it will grow , whether it will be worth taking a loan for this investment . etc etc . its a big big topic to discuss. Let me not deviate from my topic of Stock Market .

Now coming to division of the savings , I have divided the savings proportionally so that the RISK is averaged out. 100% in STOCK Market is really really risky. Because all your hard earned money will be at risk.


Medium Risk:-

Medium risk involves investing your savings into investments which yield moderate returns and varies from time to time. But the risk involved is medium. Most of the people prefer this type of investment. As most of them are scared to enter stock market, they feel that this is the best approach to invest their money. It depends from people to people again.

Usually medium risk involves people who are married , have some commitments OR people who are not married but have lot of commitments and hence feel this approach is the best.

This approach I would say to divide the risk proportionally based on the above category.
Hence your savings can be divided into 3 zones :
33% in Stocks ( The blue chip stocks and for long term only !! )
33% in Mutual Funds , ULIPS
33% in FDs, PPFs , Post Office etc etc.

Hence this type of division is called Medium Risk Investment.


LOW Risk :-

We can say almost no RISK at all. This investment is the safest possible type of investment which give you very LOW returns and your money is really SAFE here. 100% assurance . FDs , PPFs will always give you assured returns. This investment the division is very simple where majority portion goes to FDs, PPFs .

The people who belong to this category are NOT prepared to take any RISK at all because of their dependency , commitments , etc . There are many who have always want to be on the safest side and even dont try to learn about stock markets , Mutual Funds etc because they are always in the wrong conception that these investments will loose their hard earned money.

I feel really bad at times when people say STOCK Market is like GAMBLING !!! Its the worst thing to hear .. GAMBLING and stock market are no where related. Its a total misconception. If one plays with stock market every minute then he might be addict but not a gambler !! Its that he is risking his time and money .

A Smart Investor should know when to buy the stocks , when to enter into stock market , whether the stock is at the right price to buy, whether the stock will rise in future etc. If he follows this approach I am 100% sure that he/she will never be under loss !!
This is a big topic which I will cover in next chapters.

Hence I want to summarize that the people who are afraid to enter stock market thinking that STOCK MARKET is not always about losing money, then they are totally wrong . RISK is there but if we divide our risk proportionally then one get better returns in future.

I always believe in Investing now ... because we cannot predict our future, when money need will arise. Save now or Never ... Invest with the right approach and not simply dump your money into FDs. Think how much risk can you take, which category you belong to.. I am confident that this approach will make wonders because it is the most widely accepted approach .

I may not be 100% correct in the approach I mentioned. But these are my analysis after 5 years of study i.e. after reading 1000s of articles on investment, reading books , listening to lectures of Investment freaks etc etc.

Chapter 1 : Basic Terms for Beginners

People always hear a lot about Stock market.





" They hear that Stock market crashed 1000 points .. It was bloodbath . Lacs and crores of Investor's money is lost. "



" People also hear that the bull run has made many rich in just a week !! Mukesh Ambani becomes the richest man in the world because of this stock market!! "



In general people want to enter the stockmarket to make some money .But people fear a lot . They never want to risk their hard earned money !! Hence very few daring people enter stockmarket .
But I am totally against this view. One has to be smart investor. He should know which share to pick when, when to sell it . If he can make the smart picks then surely he can become Warren Buffet one day !!



But not all are as smart as him. Not all have the time in the world to actively watch this stock market. But believe me stock market is not that difficult as it looks. Its not that scary as it looks. Yes , I agree it is risky !! Stock market crash , up and downs, no one predict with 100% accuracy. There are 1000s of factors which makes the Sensex go up and down.

I have tried to explain the fundamentals and my understandings of Stock market . For beginners who have no knowledge about stock market this would be the best place to learn from basics.
Chapter 1 :-
INVESTING IN STOCKS
Many of us would like to try our luck in the Stock markets. Yes, Why Not ? Trading stocks is one of the most lucrative methods of making money.Here's Why : (Advantages)
1. You do not need a lot of money to start making money, unlike buying property and paying a monthly mortgage.
2. It requires very minimal time to trade - unlike building a conventional business.
3. It's 'fast' cash and allows for quick liquidation (You can convert it to cash easily, unlike selling a property or a business).
4. It's easy to learn how to profit from the stock market.

But before you enter into Stock market you should have some knowledge about some terms and risks involved. Let me tell you about the terms first and later the risk.

Some basic basic terms that you must know :

What is a Share or Stock ?
share or stock is a document issued by a company, which entitles its holder to be one of the owners of the company. A share is issued by a company or can be purchased from the stock market.

Here the stock is just like the monkeys in my previous post. They prices go up and down based on the same principle which was discussed in the pervious post. Ofcourse there are other factors too. Will discuss that in future.

Quick Facts on Stocks and Shares
Owning a stock or a share means you are a partial owner of the company, and you get voting rights in certain company issues
Over the long run, stocks have historically averaged about 10% annual returns However, stocks offer noguarantee of any returns and can lose value, even in the long run
Investments in stocks can generate returns through dividends even if the stock price is falling down.

Demat refers to a dematerialised account.
Just as you have to open an account with a bank if you want to save your money, make cheque payments etc, Nowadays, you need to open a demat account if you want to buy or sell stocks.
So it is just like a bank account where actual money is replaced by shares. You have to approach the DPs (remember (depository participant) DPs are like bank branches), to open your demat account. Let's say your portfolio of shares looks like this: 150 of Infosys, 50 of Wipro, 200 of HLL and 100 of ACC. All these will show in your demat account. So you don't have to possess any physical certificates showing that you own these shares. They are all held electronically in your account. As you buy and sell the shares, they are adjusted in your account. Just like a bank passbook or statement, the DP will provide you with periodic statements of holdings and transactions.
demat account is a must for trading and investing.

Stock Market Explained -

WELCOME TO STOCK MARKET
Once upon a time in a village, a man appeared and announced to thevillagers that he would buy monkeys for Rs10. The villagers seeing that there were many monkeys around, went out to the forest and started catching them. The man bought thousands at Rs10 and as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy at Rs20. This renewed the efforts of the villagers and they started catching monkeys again.

Soon the supply diminished even further and people started going back to their farms. The offer rate increased to Rs25 and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it! The man now announced that he would buy monkeys at Rs50! However, since he had to go to the city on some business, his assistant would now buy on behalf of him.

In the absence of the man, the assistant told the villagers. Look at all these monkeys in the big cage that the man has collected. I will sell them to you at Rs35 and when the man returns from the city, you can sell it to him for Rs50." The villagers squeezed up with all their savings and bought all the monkeys.

Then they never saw the man nor his assistant, only monkeys everywhere!! !

Welcome to the "Stock" Market!!!!!