Stocks Related Questions and Answers?
Stocks Related Questions and Answers:
Here we are learning about the stocks and the question and answer.
1. Why should you invest in stocks? How much money will you get back?
Put, you wish to speculate to make wealth. It’s comparatively painless, and therefore, the rewards square measure plentiful. By investing within the securities market, you will have loads of extra money for things like retirement, education, recreation otherwise you may pass away and your wealth is shared to successive generations. So, you become your family’s Most Cherished antecedent. Whether you are starting from scratch or have some thousand bucks saved, investment basics can facilitate you from occurring the road to financial well-being. This is part of a stock.
Options for Investment are:
-
- Shares
- Bonds
- Mutual funds
- Post Office Schemes
- Real Estate
Shares:
We can describe shares as the financial instrument issued by the company to raise funds from the public.
Bonds:
A bond is an investment that works like an IOU. It’s a loan to a company or government that pays investors a fixed rate of return over a specific term.
Mutual Funds:
Post office Investment-Savings Schemes The post office savings scheme includes a bucket list of products that offer reliability and risk-free returns on investment. Such security and returns are perks one mostly associates with a central government-run savings portfolio.
Real Estate:
Real estate is the property, land, buildings, air rights above the land, and underground rights below the land. The real estate is residential real estate, commercial real estate, industrial real estate, and land.
How much money will you get back?
There’s no guarantee of how your investment will perform. With company shares, it depends on the company’s performance and the economic outlook.
With funds, the chance of losing your money or making a big profit depends on the mix of different investments in the fund.
2. Habits of successful investors:
Planning:
Investment is like the other business. So, to create its work, a well-thought plan is important. With a correct and thorough plan, the associate capitalist will take the larger image under consideration, and not waffle the minor setbacks. Thus, a victorious capitalist knows of the importance of observant and analyzing the varied securities. They continuously create associating informed and well-thought decisions and not follow the herd mentality. This habit only will create one stand out from the group.
Knowing the business:
There are thousands of corporations that one will invest in. Deciding that one to take a position is crucial because it is hard because this call will determine the long run of your investment. It’s continually suggested traveling for the business during which you genuinely have an Associate in Nursing interest. For till and unless you perceive the operations of the corporate, it’ll be powerful for you to form the correct investment call. A productive capitalist can continually accompany a corporation they’ll perceive and is among the bounds of ability.
Diversification:
It is unwise to invest all your money in the stocks of only 2-3 companies. A wise and successful investor understands the risk involved in a scenario where he invests all the money in a limited set of securities. Hence, to minimize the risk involved, a successful investor always plans to diversify the portfolio by considering different stocks of different companies to invest in. Therefore, it is better to develop a full-fledged diversification plan and strictly adhere to it.
Long-term plan:
There are many times when an investor is affected by emotions and ends up focusing on short-term returns. The process of investment, however, demands patience. An investor can only be successful if he/she can look past the temporary setbacks and focus on the bigger picture. Sometimes, it is even required for them to wait for weeks and months to see any positive results. Therefore, the investor needs to have this virtue of patience and focus on long-term plans.
Continuous learning:
As important as it is for any human being to learn from mistakes, similar is the case for a successful investor. We all make mistakes, but what matters is how we recover from them and what we learn from them. Therefore, an investor needs to ponder over their failures and learn extensively from them so as not to repeat the same mistakes. Investment is a continuous process of learning.
Active management:
The stock market is dynamic; the performance goes up and down within days. You may never know when a well-performing stock goes under and starts yielding negative returns. Therefore, it becomes essential to manage the portfolio actively. A top investor will always keep a close tab on the portfolio, not only to increase the returns but also reduce the exposure towards the risk of carrying dead weight stocks in the portfolio.
Avoid delays:
In investment, the delay can have adverse effects on your portfolio. While one investor is hoping for the prices to go down to buy more, another takes advantage of this situation. An efficient investor will always try to make prompt decisions to make the most of the market conditions and avoid procrastination.
Find costs:
As an investor, it is your primary task to look for all the costs involved. While many people consider it a waste of time, it would be unwise to consider it not important. To make the most out of the investment, a successful investor will always investigate the genuine and underlying costs involved with the purchase of any security. This will not only give you a competitive edge but also help you make better decisions and save your precious money.
Make common sense a priority:
If you want to make informed decisions after considering all the indicators, it is essential to put your common sense to use. To be efficient at investing, you must be able to identify the indicators, both technical and fundamental, to determine if the stock is right for you or not.
Holding cash:
Another important successful investing habit is to make cash buffers. These buffers of cash can not only help one in tapping the raising future opportunities for investment but also to have some money saved for a downside situation.
Sticking by principles:
Every successful investor has a set of principles and targets that help in defining future decisions to be made. The primary aim of investment, the evaluation, expected returns and long-term goals must all be pre-determined by the investor to achieve higher returns and be at the top.
They keep emotions out:
Investment in the field requires the utmost rationality and leaves no room for emotions. Therefore, all the affluent investors have mastered the art of keeping their emotions in check while dealing with stocks. Even if things go downhill or your stocks stop performing as expected, it is better to stay practical and focus on the long-term picture.
Taking help:
It is truly a tricky business to work in the stock market, and one might not always know the right answer. A successful investor knows of his shortcomings or needs and can ask for help as and when needed. The involvement of a professional’s support, help, and guidance will help them stay updated and reduce the chance of failure or loss. This is the second one of stock 20.
3. When should we sell an investment?
Making money on stocks involves just two key decisions: buying at the right time and selling at the right time. You’ve got to get both the right to make a profit.
There are only three good reasons to sell:-
Liquidity, diversification/Counterweight to other assets, transparency steady, dividends, Risk-adjusted returns.
Cons:
Low growth/Little capital appreciation, Non-tax-advantaged, Subject to market risk, High management and transaction fees.
How to Invest in REITs?
-
- You can invest in publicly traded REITs and REIT mutual funds and REIT exchange-traded funds (ETF) by purchasing shares through a broker.
- You can buy shares of a non-traded REIT through a broker or financial advisor who takes part in the non-traded REIT’s offering.
- REIT’s are also included in a growing number of defined-benefit and defined-contribution employer-sponsored retirement and investment plans.
5. High vs. Low Priced Stock–What Delivers Better Returns?
It is better to choose low-priced stocks than the high priced once. That means that low-priced stocks have better chances to grow their shares price faster than high-priced stocks.
Stocks priced higher than Rs. 500 deliver higher returns both over the short & long term compared to stocks priced below Rs. 500. Investing thousands of rupees on a single stock doesn’t take any advantage.
The best example was:
Take the example of ITC. These days, with all the excise duty hikes and with the anti-tobacco lobby in an overdrive mode, it’s hard to take notice of the returns it has delivered continuously for many over 2 decades.
In 2003, ITC was trading between Rs. 770. Its current trading range is Rs. 350.
Now, for some FACTS about how rich ITC has made its investors.
If you bought 100 shares of ITC for Rs. 77,000 in the year 2003, how much will your Rs. 77,000 be worth today?
Answer= Rs. 14,00,000.
Yes, your money would have grown 1,718% in 12 years.
So that you get a complete picture, let’s calculate how much dividend would you have received over these 12 years on your investment of Rs. 77,000?
ITC dividend over the years—calculated on 100 shares purchased in 2003.
| Amounts in Indian Rupees | |||||
| 2003 | 2004 | 2005 | 2006 | 2007 | 2008 |
| 1,500 | 2,030 | 3,185 | 5,496 | 6,537 | 7,500 |
| 2009 | 2010 | 2011 | 2012 | 2013 | 2014 |
| 8,743 | 23,920 | 21,911 | 22,552 | 26,622 | 30,900 |
Total dividend of Rs. 77,000 = Rs. 1,60,896/Rs. from the year 2003 to 2014.
6. What is Cape Ratio?
CAPE or Cyclically Adjusted Price-Earnings Ratio is a less commonly used a variant of P/E Ratio. Prof. Robert Shiller of Yale University popularized this ratio and hence goes by the name, Shiller’s P/E Ratio. It is used in the assessment of whether the stock is overvalued or undervalued.
CAPE Ratio = Price/ Average earnings for 10 years adjusted for inflation.
P / E Ratio:
A P/E ratio or price-to-earnings ratio is equal to the price of a company’s stock divided by the annual earnings (per share) of the company:
P / E =Price/Annual EPS.
The P/E ratio is a rough guide to how “expensive” a stock or stock index is, as it tells you how many multiples of yearly earnings you must pay to gain the stock. The higher the P/E ratio, the more expensive the stock, all else equal.
While you can calculate a CAPE ratio for any stock, it is most commonly calculated and reported for the S&P 500 as a whole. The current CAPE ratio of 25.61 is substantially higher than the 20th century average of 15.21, which leads many to believe that the stock market is expensive, and it forecasts future equity returns to be less than the historical average.
7. What is Cash Flow?
Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business. At the most fundamental level, a company’s ability to create value for shareholders is determined by its ability to generate positive cash flows or maximize long-term free cash flow.
Cash Flow Generation Strategies:
-
- Know your expenses.
- Bundle products and services.
- Create a back-end product or service.
- Encourage repeat business.
- Pre-sell products or services.
8. What is working capital?
Working Capital is an indicator of the short-term financial position of an organization and is also a measure of its overall efficiency. Working Capital is obtained by subtracting the current liabilities from the current assets. This ratio shows whether the company possesses sufficient assets to cover its short-term debt.
Working Capital shows the liquidity levels of companies for managing day-to-day expenses and covers inventory, cash, accounts payable, accounts receivable, and short-term debt that is due. We derive working capital from several company operations, such as debt and inventory management, supplier payments and collection of revenue.
Formula
Working Capital= Current Assets – Current Liabilities.
Example
Let’s walk through an example where we can calculate a company’s working capital by looking at Company ABC’s simplified balance sheet:
Now, Working Capital=2,00,000-95,000=1,05,000.
9. What is the current ratio?
The current ratio, also known as the working capital ratio, measures the capability of a business to meet its short-term obligations within a year. The ratio considers the weight of the total current assets versus the total current liabilities. It shows the financial health of a company and how it can maximize the liquidity of its current assets to settle debt and payables. They can use the Current Ratio formula to easily measure a company’s liquidity.
Current Ratio Formula:
Current Ratio =Current Assets/Current Liabilities.
Example
If a company holds
-
- Cash = $35 million
- Marketable securities = $30 million
- Inventory = $25 million
- Short-term debt = $15 million
- Accounts payables = $15 million
Current assets
Cash + Marketable securities + Inventory = 35+30+25=90 million.
Current liabilities
Short-term debt + Accounts payables= 15+15= 30 million.
Current Ratio
Current Assets / Current Liabilities= 90 million/ 30 million
10. What is Return on Equity?
The Return On Equity ratio measures the rate of return that the owners of common stock of a company receive on their shareholdings. Return on equity signifies how good the company is in generating returns on the investment it received from its shareholders.
Return on Equity = Net Income or Profits/Shareholder’s Equity.
So if a firm has an ROE of say 1, it means Re 1 of common shareholding generates a net income of Re 1.
Example
Suppose, company ABC has generated a profit of Rs. 2,00,000 and has about 2,000 shares with stockholders at a value of Rs. 100 each. The board issues divided worth Rs. 20,000 to the shareholders.
ROE = (2,00,000-20,000) / (2,000*100) = 0.9
This would mean that for every rupee invested in ABC corporation, investors would generate Rs 0.9. This looks like a low value. This can imply that ABC was started recently and is in its slow growth stage.
11. What is the Debt-Equity Ratio?
The debt-to-equity ratio is a financial, liquidity ratio that compares a company’s total debt to total equity. The debt-to-equity ratio shows the percentage of company financing that comes from creditors and investors. A higher debt-to-equity ratio shows that more creditor financing (bank loans) is used than investor financing (shareholders).
Debt to equity ratio = Total Liabilities/ Total Equity.
Example
Assume a company has $300,000 of bank lines of credit and a $500,000 mortgage on its property. The shareholders of the company have invested $1.2 million. Here is how you calculate the debt-to-equity ratio.
Debt to equity ratio=$300,000+$500,000/$12,00,000=0.6
12. How do you make money from stocks?
There are two types of ways to make money from stocks.
1. Eventual profits:
Your shares increasing, price over time and selling it is called eventual profits. For example, if you invested $100 in stock then it eventually started growing up and reached up to $120 then you get a profit of $20.
2. Dividend Profits:
The other way of making money from stocks is to collect dividend money. Like we can’t say, all companies pay dividends, but most of the big companies pay dividends. If you buy the stocks, then you can be paid dividends every three months for your stocks.
For example:
Let us consider the stock has a 2% dividend a year then you can get a $2 amount course a year the great thing was big companies raise the dividend amount frequently. It means that if your dividend amount starts at $2, it might increase to $4, $6, and so on. There are so many companies that consistently increase their dividend to 20, 30,40 50 years, and so on.
The only disadvantage of dividends is that the company can cut dividends at any point of time they want. But most of the big companies don’t do that, or they will not cut their dividends until and unless they have stuck in some financial problem.
13. What are Bonus Shares? Why Bonus Shares are issued?
A bonus issue is a stock dividend allotted by the company to reward the shareholders. It issues the bonus shares out of the reserves of the company. These are free shares that the shareholders receive against shares that they hold. These allotments typically come in a fixed ratio such as 1:1, 2:1, 3:1, etc.
If the ratio is 2:1 ratio, the existing shareholders get 2 additional shares for every 1 share they hold at no additional cost. So if a shareholder owns 100 shares, then he will be issued an additional 200 shares, so his total holding will become 300 shares. When the bonus shares are issued, the number of shares the shareholder holds will increase, but the overall value of an investment will remain the same.
14. What is IPO? How can I invest in an IPO?
What is an IPO?
An initial public offering is a process by which a private company can go public by selling its stocks to the public. It could be a new, young company or an old company that is listed on an exchange and hence goes public. Companies can raise equity capital with the help of an IPO by issuing new shares to the public or the existing shareholders can sell their shares to the public raising no fresh capital.
How can I invest in an IPO?
1. Decision:
The first step is to choose the IPO that you wish to apply for. A great way to decide is by going through the company’s prospectus. You can find them on the Securities and Exchange Board of India’s (SEBI’s) website.
The prospectus fairly shows the company’s business plan and its purpose. Once you invest in a particular company’s IPO, the next step is to arrange for funds.
2. Funding:
You can use your savings to invest in an IPO. But worry not if you don’t have sufficient funds in your account.
There are a few banks and non-banking finance companies that will lend you money at a certain interest rate. So, inquire about the interest rates before you take a loan.
3. Demat-cum-trading account:
A Demat account is a prerequisite to apply for an IPO and is nothing but a facility to store your stocks and financial securities electronically and this account can be opened by submitting your PAN card, address, Aadhaar card, and identity proofs.
4. Application process:
You can apply for an IPO through your trading account or bank account. Some banks bunch trading, demat and bank accounts.
Once you have activated your trading-cum-Demat account, you need to know of the Application Supported by Blocked Amount (ASBA) facility, which is compulsory for IPO applications. The ASBA is an application that authorizes banks to block money in your bank account.
The ASBA is available in physical and Demat form. The facility eliminates the use of demand drafts and cheques. All you need to do is specify your PAN, Demat account number, bank account number, and bidding details in the application.
5. Bidding:
You need to bid while applying for shares, as per they mention the lot size in the prospectus. The lot size is the minimum number of shares you have to apply for during an IPO.
There is a bid price too. The company usually sets a price band. We know the upper limit as the cap price while we call the lowest floor price. Bid for shares in this price range.
Although you can revise your bid during an IPO, it is important to note that you will need to block the money required while bidding. The blocked amount stays in the bank account and earns interest until allotment.
6. Allotment:
As mentioned before, demand may outstrip the actual number of shares issued in the market.
There is a possibility that you may get fewer shares than you had asked for. Sometimes, you might fail to get any at all. In these cases, the bank will unlock your bid money (in part or full).
But if you are lucky and get a full allotment, you would get a Confirmatory Allotment Note (CAN) within six working days after closure of the IPO process, also known as a book-built issue.
Once the shares are allotted, it will credit them to your Demat account. The next step is to wait for the listing of shares on stock exchanges, which is done within seven days from the finalization of the issue.
15. What is Bond? Bond characteristics and important parameters to be considered while buying and selling bonds?
Bonds:
A bond is a financial security where some institution borrows money from an investor which is paid back at a specific time at a specific interest rate. Terms associated with bonds:
-
- Principal: the amount being lent.
- Maturity date: the date that the principal plus interest is paid back.
- Coupon: We will pay the interest rate of the bond back beside the principal.
Here are a lot of bond issuers to form multiple bond types, such as corporate bonds, government bonds, and treasury bonds.
Characteristics of a Bond:
-
- Face value is the amount the bond will be worth at maturity and the amount the bond issuer uses when calculating interest payments.
- The coupon rate is the interest rate, and the bond issuer will pay on the face value of the bond in stocks.
- Coupon dates are the dates on which the bond issuer will make interest payments on stocks.
- The maturity date is the date on which the bond will mature and the bond issuer will pay the bondholder the face value of the bond.
- The issue price is the price at which the bond issuer originally sells the bonds.
Buying and Selling Bonds:
Here are a few terms you should be familiar with when buying and selling bonds:
-
- The market price is the price at which the bond trades on the secondary market.
- Selling at a premium was the term used to describe a bond with a market price that is higher than its face value.
- Selling at a discount was the term used to describe a bond with a market price that is lower than its face value.
16. What is SEBI? Structure of SEBI (Securities and Exchange Board of India)
SEBI
The Securities and Exchange Board of India (SEBI) is a regulatory body of the Government of India. It controls the securities market and established on April 12, 1992, under the SEBI Act, 1992 and headquartered at the Bandra Kurla Complex in Mumbai, India. It has regional offices in major cities of India, such as New Delhi, Kolkata, Chennai, and Ahmedabad. These cover the North, South, East, and West regions of India. Besides, it has a network of local branch offices in prominent Indian cities.
Structure of SEBI:
-
- A chairman nominated by the Union Government of India
- Two members who are officers from the Union Finance Ministry.
- One member from the Reserve Bank of India.
- Five other members are also nominated by the Union Government of India.
The Securities and Exchange Board of India or SEBI is the regulator of capital market activities in India. Let’s simplify. SEBI regulates:
-
- Stockbrokers which provide trading platforms.
- Mutual Fund houses.
- Merchant Bankers (who help companies in IPO etc).
- Depositories.
17. What is a Demat account? How is it useful?
We mainly use a Demat account for holding shares and securities in a format namely as an electronic format. We also know the Demat account as Dematerialized Account. You use the Demat account when you do the online trading; you can buy the share and hold in a Demat account. For buying shares, you need to have a Demat account or you can say that a Demat account is a must for buying and selling the shares.
BENEFITS OF OPENING A DEMAT ACCOUNT
There are several benefits of opening a Demat account. It gives a few most important benefits below.
-
- It is a suitable and effortless technique to hold your securities.
- There is an instant move of all securities.
- There is no obligation of stamp duty or securities move.
- More secure than having paper shares.
- Reduced paperwork time for the move of securities.
- There is an abridged price of transactions.
- You can sell the single share there is no problem with an odd lot.
- With the help of a Single Demat Account, you can do the equity and debt investments.
- Shareholders can work from anywhere with the help of a Demat account (by Electronic Method).
18. What is Minimum Investment in Mutual Funds?
The minimum amount needed to invest in mutual funds is very low. You can start investing in SIP (Systematic Investment Plan). With an amount of Rs. 500 only.
The biggest advantage of mutual funds is that investors can start with a very low amount and investment is managed by professional fund managers. However, the amount you are planning to invest depends on your financial planning and wealth management goals.
The following are the steps you should consider before investing in mutual funds:
-
- The first step is to set a financial goal.
- How much amount can you accumulate to invest?
- Understand your risk appetite. Choose the category of funds that meets your risks and return criteria.
Risks and returns are directly proportional to each other. SIP also involves market-linked risks that are higher for equity funds and lower in the balanced and debt funds. The risk exposure in SIP depends on the investment option and its risk profile and liquidity. However, the risk in SIP is reduced by fund managers and fund houses by applying diversification in a portfolio.
19. Where Does All the Money Go When Market Crashes?
Imagine you had land that you bought in 2001 at a cost of Rs. 10,00,000.
In 2014, you want to know the actual market value of your land and come to know that it is now worth 20,00,000. Now, according to you. You are wealthier by Rs. 10,00,000.
Now in the year 2015 suddenly what happens is they discover it that the locality in no more developing and the market value of the landfall to Rs. 12,00,000. Where did the Rs. 8,00,000 go?
This is simple economics. The price of a product (in your case share) depends upon supply and demand and other external and internal factors that affect demand and supply. Generally, the stock is being traded on an exchange at some P/E Ratio. The market price of shares does not reflect its book value. So if there is anticipation by the investor that a piece of news can help grow the company its demand rises so does the price and vice versa, but actually, the book value of the share is not rising it remains the same.
Here the price of the stock will fall in India because of their loss of revenue or trade, thus the stock price fell and as Sensex and Nifty are the index of different stocks, it also fell showing the trend of the stock market.
20. What are SIPs?
A SIP or a Systematic Investment Plan allows an investor to invest a fixed amount regularly in a mutual fund scheme, typically an equity mutual fund scheme.
Benefits of investing in SIPs:
SIP is an instrument that helps you avoid the risk of timing the markets and facilitates wealth creation in a disciplined manner by averaging the cost of investments.
-
- It gives financial discipline to your life.
- It helps you to invest regularly without battling with market mood, index level, etc.
- Another benefit is the power of compounding. When you invest over a long period and earn returns on the returns earned by your investment, money would start compounding.
How much money do I need to start a SIP?
You can start investing in a mutual fund scheme via SIP with a minimum of Rs. 500.
Can I customize my SIP?
Yes, you can. Though the most popular SIP is investing a fixed amount every month, investors can customize the way they put money via SIPs. Many fund houses allow investors to invest monthly, bi-monthly and fortnightly, according to their convenience.
Apart from this, Step-up SIPs allow investors to increase the SIP amount periodically. ‘Alert SIP’ is another form of the regular systematic investment plan that sends an alert to the investor to buy more when the markets are down.
With the ‘perpetual SIPs,’ investors don’t have to choose the end date of the SIP. Once the goal is met, the investors can stop the SIP by sending a written communication to the fund house.