If you want to buy or sell shares of a stock, you are required to open an Demat or Investment account to build your portfolio through an authorized person. You ordinarily pay the authorized person a fee or a commission for the service provided.
How do you Buy and Sell Stocks
- If you place a market order, the authorized person will trade the stock at the current market price. However, the price of the stock may change before your order goes through. In this case, you may end up with a different price than what you had expected.
- A limit order is when the stock reaches the limit price then the order would be valid. As a result, if the stock goes up or down before the sale goes through, your order may not go through.
Working with an Authorized Licensed Person
When you are ready to start investing, you need to work with an authorized person to help you buy the securities you want for your portfolio. A list of licensed authorized persons is published on the official website which can help you in choosing the one that suits you.
An authorized person is required by law to hold a valid license and must adhere to government guidelines. These guidelines provide specific rules for responsible trading, charging appropriate fees and commissions, as well as providing information about investments.
Your authorized person should be able to help you through a professional who will answer any questions you might have. Here are some questions to ask an authorized person you consider working with:
- How much experience do you have working with investors like me?
- What investments do you recommend for someone just starting out?
- How much do I need to start trading?
- How will you keep me up-to-date on how my investments are doing?
- How can I pay you for your services?
What does Owning Stock Means?
When you buy a stock, you share equity, or ownership of a small piece of a company.
- Owning shares of stock gives you the right to participate in the company’s major decisions.
- Stock ownership also gives you the right to dividend income, or some of the company’s profits, if the Board of Directors decides to pay a dividend.
- Since you own the stock, you have the right to sell it when you want to.
Each year, the company holds an annual meeting where shareholders vote on certain matters. For example, shareholders may decide whether to approve the issue of additional shares of stock or elect a candidate to the Board of Directors. The number of votes you have depends on the number of shares you own. You can also attend the meeting and vote in person or you can cast your vote through another person by following the instructions the company sends along with the announcement of the meeting.
A company issues its first round of stock through an Initial Public Offering, or IPO, at a set price. The money raised from the IPO belongs to the company. After that, investors buy and sell shares in the stock market. The price of the stock fluctuates up and down in response to how much people are willing to pay to own the shares.
Suggested Read: Ratio Analysis – Objectives, Advantages and Limitations
Many things can influence a stock’s value, which is measured by its price. These factors include how much money the company earns, how well its management performs, the type of competition the company is facing, and the market conditions in general.
How Can you Gain Profit?
Stocks can be a good investment in two primary ways, if you buy:
- Income stocks which distributes a part of its profits regularly.
- Growth stocks which have the potential to gain value over time, and often reinvest their profits instead of paying dividends
You can own stocks from both types.
How Can you Lose?
You can lose your investment in stocks if:
- the shares lost their value, especially in the short term, in case investors lose confidence in the stock.
- there are more sellers than buyers in the secondary market.
- the company that owns the stocks stopped paying dividends.
Factors to Consider in Selecting a Stock
While you cannot be certain of how any stock will perform in the future, researching will give you a better idea of whether a particular stock is a good investment for you. You can find information about a company on their official website by checking the company’s news column.
You can also visit the company’s website, review its quarterly statements and annual reports, and read newspapers and other financial periodicals. You may also check the reports about a company that are available on official financial websites.
There are many factors to consider when you research a company. These include:
a) Stock earnings per share. The term earning refers to a company’s profits after expenses. Since it might be difficult to compare two companies of different sizes on earning alone, you can use stock earnings per share in making your investment decision.
Stock earnings per share are calculated by dividing a company’s total earning by the number of outstanding shares issued. The result will tell you how much potential earning each share represents.
b) Current stock price. The current stock price is important because you do not want to buy a stock when its price is too high or purchase stocks that you cannot afford. If your research suggests a certain company as a good investment, you can decide how much you are willing to pay to own it. If the stock seems too expensive, you might wait until the price comes down to the amount you are willing to pay.
c) P/E ratio. A company’s price-to-earnings ratio is one of the most important ratios to measure the (increase/ decrease) in the share’s price. It could urge people to invest in it to gain profits. To calculate a company’s P/E ratio, you divide its market price per share by its earnings per share.
For example, if a stock had a price of $55 per share, and earnings of $2 per share then your P/E ratio would be: Price per share: $55/Earnings per share: $2 = P/E of 27.5
If the company continued to achieve revenue of $2 of shares, the owner of the share needs 27.5 years to get his invested capital. Therefore, the use of P/E ratio as an indicator is better than just using the share price just to take an investment decision.
For example, a stock with a price of $100 with a P/E ratio of 10 is considered better than a stock with $10 with a P/E ratio of 20 multiplied, that is because the return on the first share is greater than the return of the second share, even if the value is less.
Of course there are many other factors within the P/E ratio such as the future and the age of the company, where there are companies with high and not enticing P/E ratio. This results from the fact that these companies are at their beginnings and did not achieve its inception in profits which reflect the P/E ratio in a positive way and other factors that according to them you make your investment decision.
Your Role in Building your Portfolio
One way to minimize risk is to create a well rounded portfolio. When you are evaluating a stock, you would want to ask how it fits in with the rest of your holdings. If you already have several similar investments, you may want to look for a stock of a company that is in a different type of business from the rest of your holdings.