Demat Account for Online Share Trading

A Demat account with a bank or any financial institution is what a broker need to do online share trading. It has to be noted that a free Demat account or free trading account are same. Any investor willing to buy or sell stocks online need to have a Demat account or a trading account. You can open a Demat account for online share trading with any bank or financial institution offering the service. This bank or the financial institution will convert your physical security holdings into electronic (Dematerialized) holdings.

How to Open a Demat Account 

Now a days, most banks have the facility to open Demat account. You will have to submit following documents to open a Demat account:
  • Tax Identification Number 
  • A canceled Cheque 
  • Identification proof 
  • Address proof 
  • Photograph 
This Demat account is linked with your bank account. You can easily transfer funds from your bank account to your Demat account for online share trading.

All online trading and transactions that take place through this Demat account is handled by depository participant (DP). All share brokers / stock brokers, brokerage companies and R&T agents register under the SEBI act to handle share trading transaction.

How to Do Online Share Trading with a Demat Account 

A Demat account can help you do online share trading in following ways:
  1. Transfer of Shares and Settlements - A Demat account is opened with a bank registered with a depository. The depository handles all the transfer and settlements. You just have to provide an
    Demat Account
    instruction slip. If you are selling securities then it will be a delivery instruction slip. If you are purchasing securities then it will be a receipt instruction slip or one time standing instructions for credit.
  2. Receipt of Corporate Benefits - A Demat account is credit with all securities entitlements like bonus and rights. Just choose the right option in the share application form. This account forwards all cash benefits like dividends and interest directly to you and not through the depository. MICR code in Bank details in your Demat account ensures credit of cash transactions to your respective bank account without any mistake.
  3. Dematerialisation of Shares - The bank in which you hold your Demat account can arrange to convert your physical holdings into electronic form at your request. Just lodge the share certificates with the bank accompanied by a Dematerialisation Request Form (DRF).
  4. Rematerilialisation - The bank in which you hold your Demat account can help you convert your electronic shares back to physical shares.
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Day Trading Tips and Strategies

Day trading is the practice of buying and selling financial instruments such as stocks, stock options, currencies, futures contracts such as equity index futures, interest rate futures, and commodity futures within the same trading day. In any day trading business, a transaction is closed before the market close of the trading day. People or traders participating in day trading business are called active traders or day traders. Most of the day traders are normally employees of bank or investment firm because they have better knowledge and understanding. Most of them are specialists in equity investment and fund management. With the advancement of technology and internet, day trading has become increasingly popular among common investors.

Making Money as a Day Trader


One can make a lot of money as a day trader, but it's not as simple as other small business, currency trading or work from homejobs. Day trading jobs can be done from home but generally need more time and involvement than other work from home business. Day trading involves risks but if one can take calculated risks, he / she can make a lot of money in a short period of time. A beginner or a newbie to this business may even end up losing money. To be a successful day trader, one needs to follow rule of the game and understand some of the basics.

Basics of Day Trading

Day Trading

Many people or investors consider day trading an easy means of investing and making money in a short period of time and get rich easily because they don't need to wait for long periods of time to see their investments grow. One should always keep in mind that while it can be fun to invest in day trading, it's important not to allocate more than 3-5% of total equity corpus for the purposes of day trading. This is a safe amount to stick with because if it is all lost it won't ruin the investor financially. Many people get carried away and will take as much as 25% off their equity corpus for day trading and finally they end up losing all their money.

Day Trading Tools and Software


Today there is 24 hour access to the stocks via stock market tickers, stock market websites etc. Many people think that with all these technologies available today, they are not going to lose their money. This is wrong. These tools may help in day trading but they don't guarantee success. One should always remember that day trading is always risky. It is extremely important to keep an eagle's eye on the stocks. Use all available tools, but don't mistakenly think that day trading is safe.

Understanding Day Trading


Any individual who really wants to make money as a day trader needs to learn and understand some of the basics before investing. Learn day trading terminology like futures, call option, put option, delta, and stop loss trigger. An understanding of these terms can be very helpful.

Day Trading Rules


There are some important rules associated with day trading. Firstly, always be aware of worldwide economic status and the company or stocks' business practices. One should always try to choose large cap stocks with high trading volumes. This will help to avoid getting stuck with an illiquid stock. A day trader may also have to book losses. This will improve future profits. As a day trader one can always learn with experience and time. A day trader should set standards and try to achieve set targets.



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Share Trading Mistakes - Stock Trading Mistakes To Avoid

Stock trading is a business where even the slightest mistake can lead to huge loss. Investors must learn common share trading mistakes to be avoided. They must learn from their own past experience, experiences of friends and family members and other market experts.

Here are some tips and advice on how to avoid common stock trading mistakes:

Avoid Stock Trading Mistakes
  1. Quality Vs Quantity: Buy only quality stocks. Do not run after cheap and poor quality stocks.
  2. Cut Losses: If your stock is continuously falling then book loss at 7% - 8% below your purchase price. This will protect you from further loss.
  3. Follow The Market: Yes, follow the market and try to buy at the right price. This way you increase your chances of making profit and in case the market goes against your stock, you will suffer minimum loss.
  4. Low Stock Prices: If price of a stock is low, it doesn't necessarily means that you can buy it. Do all your homework before investing.
  5. Be Practical: Don't be emotional is stock trading business. Be practical. If you have bought a stock for $ 100 and it comes down to $ 92. Sell it off and close your position. Buy it back when the market conditions are in favour of the stock.
  6. Invest for Long Term: Never invest your money in stock market for short-term. Invest for long term.
  7. Portfolio Management: Decide and create your investment portfolio. Investing without a planned portfolio is not professional. Have a diversified portfolio.
  8. Set You Goal: Set your investment goals. Decide when and why do you need the money back and invest accordingly.
  9. Monitor Top Mutual Funds: Keep an eye on top mutual funds and where they are investing money. Fund managers at mutual fund companies are highly qualified and experienced people. They do all expert study and research and study the market before investing. Spot stocks where these companies are investing and do some homework yourself and invest in those stocks.
  10. Have Patience: Never be in hurry in stock market business. This business demands patience. Do not panic.
  11. Monitor Stock Market: Monitor the stock market and current affairs in the country. Monitor top news and act accordingly.
  12. Avoid Margin Trading or Intraday Trading: Margin trading or intraday trading can be highly risky. Avoid trading.
  13. Book Profit at The Right Time: Book your profit at the right time. Never be too greedy.
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Investment Portfolio Management

In my previous articles, I have already explained - Have Diversified Portfolio - Why? - Portfolio Management  and Portfolio Vs Age - Portfolio and Age Relationship. Here I am going to explain few other important aspects of better investment portfolio management.

Portfolio Review


Assuming that you did all you homework and managed your portfolio based on your age and risk profile and you have a diversified investment portfolio. In a volatile world of share trading and investments, this is not a guarantee of making money or success. Now you have to be more professional in managing your portfolio to decrease or even eliminate risks.

For this, you need to periodically check and review your portfolio and make some changes depending upon the market conditions and other internal and external factors. When to review your portfolio depends on the type and amount of securities held in the portfolio. Remember, it is your hard earned money and you just cannot lose it. It is expert advice to constantly monitor your portfolio and make adjustments as the situation demands. In a volatile market you have no option but to closely monitor and act swiftly and intelligently.

How To Make Adjustments in Portfolio


Portfolio Management
Making adjustments doesn’t mean you need to hurry and buy or sell shares. Here are few expert tips and suggestion to help you.
  • If a stock that you bought earlier had given you your consistent expected results but the price is not going up for some time, don’t rush to sell it off and close your position. Hold the stock. Have patience. The stock will improve when the current unfavorable conditions are gone.
  • Never sell stocks thinking that you can buy it back when the prices are right. When you do this, you have to pay commission or brokerage to your broker for selling and again for buying. Also you may not be able to decide when to buy back the stock.
  • Have a diversified portfolio. Invest in different sectors and in different stocks depending upon your fund and risk profile. As experts say – Never put all your eggs in one basket. Diversify your investment to decrease risk.
  • Rotate your investment across different sectors. If a particular sector had done well in a session, it doesn’t means it will do better again in the next session. There is no guarantee. Think like a
    professional investor and not like a trader. Look at sectors where there is less of Extreme Volatility. These are the sectors to target. Book profit from fully valued stocks and reinvest in current and future good “BUY” stocks. You can also consider targeting stocks that are temporarily down for some temporary reasons.

Measure The Performance of Your Portfolio


Monitor and measure the performance of your portfolio twice a month. Compare performance of individual stocks with overall performance of the market. If you have done all your study and research, you can ignore swing of the stock market.

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Portfolio Vs Age - Portfolio and Age Relationship

The age of a person determines what would be the best investment portfolio for his or her future. Whether to invests more in equities and less in fixed income or less in equities and more in fixed income depends on the age of the person. As a simple rule, the less the age the more risk a person can take because he or she has more years to earn money.

Portfolio Vs Age
The more the age, the less risk a person must take. So, portfolio management depends on age and risk profile.

However, one must remember that fixed income cannot compete with ever-rising inflation. It is equities that can compete with the increasing inflation and hence everyone must have some equity in his or her portfolio. Also it is important to diversify fixed income investment to different tools like government bonds, fixed deposits and debentures etc.

Below table will explain how to manage portfolio based on age:


Age
Portfolio
Above 60 40% in Stocks and Mutual Funds
10% in Cash
50% in Fixed Income
50 to 60 50% in Stocks and Mutual Funds
10% in Cash
40% in Fixed Income
40 to 50 60% in Stocks and Mutual Funds
10% in Cash 
30% in Fixed Income
30 to 40 70% in Stocks and Mutual Funds
10% in Cash
20% in Fixed Income
Below 30 80% in Stocks and Mutual Funds
10% in Cash
10% in Fixed Income

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Have Diversified Portfolio - Why? - Portfolio Management

It is very important to have a diversified portfolio to minimize risks and protect your investment. Diversification of investment in different investment tools shields you from market fluctuation and potential risks.

Investment in Stock Market


When investing in stock market, it is important to buy shares of different stocks from different sectors. Even the best stocks possess some risk and there is always a chance of loss. Apart from investing in high-risk high-gain shares, it is important to invest in some defensive stocks to protect your hard earned money from potential losses.

Risk-Free Investment


Investors must also invest some portion of their saving in government bonds and Bank Fixed Deposits to safeguard their investments as these tools possess very less to no risk. These investment tools also offer fixed income.

Portfolio management is all about managing investment so that the invested money grows with minimum risk. The best strategy to portfolio management would be to select the best performing sectors and then pick the best performing stocks within these sectors and then invest your money. Apart from stock market, people should also invest some portion of their saving in money market fund and in fixed income tools.

Portfolio Management

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Stock Trading | Share Trading | Mutual Fund | Stock Market

Share trading, stock trading, mutual fund, stock markets are all terms of investment. These investment tools help to invest your savings in the growth of an economy by becoming shareholder of a company and help your money grow with growth of economy and companies.

Beginners to investment need to understand the basics of share trading and how to invest in stock market. Proper study and research is a must for a profitable investment and to avoid loss.

Share trading is all about making wise decisions as to when to buy shares, when to sell shares and whether or not to hold shares of a company.

This website is designed to help beginners understand the basics fundamentals of share trading and stock market and invest their money wisely and make profit. Investors who have some gained some experience in share trading may also find this website very helpful.


Explore following articles to learn all about share trading and stock market.

New to Investing?

Saving & Investment Options

Why Invest in Equities?


Set Your Investment Goals

Basics of Stock Market

Invest Like an Expert
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When To Buy Or Sell Stocks

My Stock is Going Up. Should I buy More?


If your stock climbs 20% to 25% in 7-8 weeks and the stock still shows strength and growth signals, you can consider buying more of this stock.

How To Understand When to Buy Stocks?


Here are some expert tips that can help you understand and decide when and how to select stocks to buy:
  1. If the company shows growth of about 20% to 25% in last 3 years and last 3 quarters and has potential for long-term and short-term earnings growth, you can consider buying it.
  2. If the sales, profit margins and return on equity is consistently growing in the last 3 quarters, the stock is worth investing.
  3. If the company has launched some dynamic new products or services with great demand or if there is some strong change in the top management of the company, the stock need some attention.
  4. Focus on leading sectors and leading companies in the sector. Don't run after cheap stocks.
  5. Focus on stock where leading mutual funds are investing. Mutual fund companies do lot of study and research before investing.
  6. Focus on stocks that make new highs with high volume.

How to Understand When to Sell Stocks?


When to Buy and Sell Stocks
When to buy stocks is relatively easy to understand. When to sell stocks needs some thinking. Here are some tips to help.
  1. If you  bought a stock 
  2. with some expectation but your expectation is not met, consider selling the stock.
  3. If your stock has made new highs, consider selling some portion of your position. Never sell all your shares. Monitor the stock and the market before selling all your shares.
  4. If you have better alternative stocks than your poorly performing stock, consider selling your stock and take new position in a better performing stock.
  5. Consider selling your stock if you are getting tax benefits.
  6. If something wrong happens with a company and you are expecting things to get worse, consider selling the stock.
  7. If the earning of a company is not improving over 6 to 9 months, then the stock needs some attention. Study the reasons and if required, consider selling the stock.
  8. If you are making loss with a stock and there is no sign of recovery, consider selling the stock. As a basic rule of share trading, most experienced investors sell their stock if it falls by 8% of the buy price. Not booking loss at an early stage can lead to even bigger loss. However, if you have done your homework and have picked the best stock, you can still keep it in your portfolio. Monitor the stock and the company consistently and act according to the situation.
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How to Buy Stocks at Bargain Price

Many good stocks are often available at bargain prices.With some basic tips and tricks, you can easily spot these stocks and buy the shares. Here are some expert tips to find and buy stocks at bargain:

How to Select Stocks to Buy at Bargain

Buy Shares at Bargain
  1. If you follow the stock market and related news and updates, find out stocks that other investors are not interested in because of some short-term temporary reason.
  2. If a sector is doing well but some stock within the sector is not doing well and is not favorable to investors, watch those stock. Do some research on them and pick the best ones.
  3. Use the P/E ratio to determine good stocks that are out of favor. Stocks with low P/E ratio  can sometimes signal out of favor stocks.
  4. Pick stocks and study their Price-to-Sales Ratio. Look for stocks that have high Price-to-Sales Ratio in the past but are temporarily low at the current market situation.
  5. Look for stocks that have about 20% or above Earnings Growth and a P/E Ration at about 10. These stocks are worth investing. Sometimes these stocks are overlooked by investors and you can take the opportunity to buy them at bargain price.
  6. Look for stocks that have higher Return on Equity. This data will tell you how much your investment will earn.
Using above tips, investors can easily find good stocks that are out of favor and are worth investing.

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Share Trading Dictionary - Glossary & Meaning of Share Trading Terms

Here is a dictionary and glossary of share trading terms and their meaning. These are most commonly used terms.

  1. Aggressive Strategy - Strategy to invest in stocks with aggression and  high risk with expectation of good return.
  2. Buy - To invest in shares of a stock for intraday trading, short-term investment or long-term investment.
  3. Sell - To sell a stock and book profit or loss.
  4. Hold - To hold a stock in portfolio for a longer period for a more or better return.
  5. Buy at Open - Placing a buy order before the market opens. The order gets executed at the current opening price.
  6. Capital Gain- Profit from the sale of an investment.
    Share Trading Dictionary
  7. Capital Loss- Loss from sale of an investment.
  8. Close a Position - To end an investment by selling or buying. Closing a long position requires selling, and closing a short position requires buying.
  9. Cover - To purchase a previously sold contract.
  10. Current Market Value -The current value of a portfolio.
  11. Day Trader - A stock trader who buys and sells stocks on the dame day.
  12. Day Trading or Intraday - Buying and selling stocks on the same trading day without taking possession of stocks for a long time.
  13. Diversification - Creating a portfolio by investing in several stocks, bonds and other investments.
  14. Equity - A stock or any other security representing an ownership interest.
  15. Fundamental Analysis - Examining the financial and managerial aspects of a company prior to investing.
  16. Growth Strategy -Investing in companies that are growing faster than its competitors.
  17. Hedge Fund - Fund for aggressive trading.
  18. IRA (Individual Retirement Account) -A tax-deferred retirement account for an individual that allows him to set aside up to $2,000 per year, with earnings tax-deferred until withdrawals begin at age 59 1/2 or later.
  19. Long-Term Investment - Investment money for a longer period.
  20. Limit Order - Buying or selling stocks on a fixed price rather than the current market price.
  21. Long Position - Buy  stocks from the long side with the expectation that prices will rise.
  22. Margin Account - An account with a brokerage company allowing an investor to borrow money from the broker to buy securities.
  23. Money Management -The art to manage money with investments, budgeting, banking, and taxes.
  24. Open a Position -To open an investment buy buying or selling. Opening a long position requires buying, and opening a short position requires selling.
  25. Overbought and Oversold Indicator - Tool to determine if stocks are oversold at higher rates. 
  26. Risk Management - The art to manage risk profile of an investor.
  27. Risk Tolerance -An investor's potential to handle risks in terms of investment.
  28. S&P 500 - A basket of 500 stocks that are considered to be widely held by investors.
  29. Short - The state of having sold a stock short without having covered it.
  30. Short Selling - Borrowing a security or commodity futures contract from a broker and selling it with the hope of making profit. All such securities must be later bought back and returned to the broker.
  31. Spread - Difference between the current bid and the current ask price of a stock.
  32. Technical Analysis - A method of evaluating securities through historical prices and other trading variables.
  33. Ticker Symbol - A system of letters used to uniquely identify a stock or mutual fund.
  34. Volatility - The relative rate at which the price of a stock moves up and down.
  35. Volume - The number of shares, bonds or contracts traded during a given period, for a security or an entire exchange.
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What is The Right Time and Price to Buy Stocks

Many investors to stock market are often confused as to when to buy stocks and at what price. The share market is falling and the rates of shares have fallen. Is this the right time to buy? Or, the stock market is touching new heights. Share prices are rising and many investors are making profit. Is this the right time to buy stocks?

Well, the simple rule is that not all stocks are worth buying in a rising or falling market.

There are some basic fundamentals to understand which shares need attention and are worth buying.

When to Buy Stocks
  1. Most investors will invest their money in shares with the hope that the revenue and earning of the company will grow and they will make profit. This is not true with all stocks. In a rising or falling market, pay attention to stocks that are doing well. Monitor the stocks constantly and when the stock misses an earnings report or its revenue doesn't grow fast enough, try to buy the stock. This way you are buying the stock at a lower P/E level and the value of the stock is much better.
  2. Focus on market leaders. These companies dominate their niche and grow bigger.
  3. Focus on companies that are showing consistent earning and growth and increasing rates every year.
  4. Focus on companies that are showing more average revenue than their competitors.
  5. Focus on companies with strong top management.
  6. Focus on sectors that have high and long-term growth plans and invest for long-term.
A stock with all the above advantages can be expensive but it is worth buying. Cheap stocks will not have all these advantages. Invest your money with a long-term view. Nobody gets richer quickly. Share trading and stock market business is not a “Get Rich Quick” business. It demands patience. If you have limited budget, buy good stocks even if they cost more. Buying more cheap stocks is not going to make you rich. Your good quality stocks will grow with time.

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Stock Market Trend & Signal - How to Understand

There are some tips and tricks to understand trends and signals of a stock market. These signs and signals can help you understand what are the right stocks to buy and when, when to sell stocks and when to hold stocks.

Here are some proven tips and suggestions to understand the signals of stock market:

Understanding Stock Market Signals
  1. Bullish Market: If there some good news about a company or stock, people will buy the stocks with the hope that more buying will follow that will raise the price. Many investors will do this. But there is a saturation point to everything. Once people have invested all their savings, there won't be any more buying of these stocks. This will stop the stock from raising.Try to understand this saturation point and liquidate your stock and book profit.
  2. Political & Economic Conditions: Stock market is very emotional. It fears poor economic and political situation. If there is economic crisis in the country or there is political uncertainty, it is a signal to stay ways from the stock market.
  3. Too Many IPOs: If there is listing of too many IPOs on a premium in a very short period of time, stay away from them. The value of such IPOs will come down very soon.

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Should I Buy Volatile Stocks?

Many new investors to share market often ask whether they should invest in volatile stocks / shares or not.

The answer is NO - Volatile stocks have too many risks involved. Stock prices can rise or fall to a great extent within a very short period of time. Buying right stocks at the right time is the secret to success in stock market business.

If prices of a stock is falling too sharply or rising too sharply, don’t think it is worth buying. Try to under the reason behind rise or fall and the pick and buy or sell the stock.

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How To Understand Direction of Stock Market

Understanding the stock market is not that difficult if you follow some of the basic rules. Check out the charts on your online share trading website or on e-broking websites. Make note of price and volume changes. Stocks will show selling signals. 

If the market is constantly falling, sell off your worst performing stocks first. If the stock market continues to fall, sell more of your poor performing stocks. Wait for few days and keep an eye on the market. If situation doesn’t turns around, consider selling all your stocks. If any of your stocks fall below 10% of your buy price, sell it immediately. If you have done good research on the company and the stock, you can stick to it and wait for the market to recover.

Recovery of Stock Market After Downfall


Stock Market Direction
Every stock market will try to recover after a prolonged downfall and try to rally from low levels. Don’t hurry with small rise in a couple of days. It is too early to say that the market has recovered. Don't rush to buy too early. Wait and watch for at least 10 to 15 days to confirm if a new upward trend has started. 

With a new upward rally, stocks from leading sectors will recover first and other sectors and stocks will follow. So, focus on stocks of leading sectors. Invest in these stocks on first or second base and sell off and book profit on third base. Don’t wait for the stock to increase further and form a fourth base. This can be too risky and the stock may start falling.

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How Many Stocks to Buy - Portfolio Management

It is next to impossible to keep track of a large number of stocks. Hence it is advised to keep track of few selected and well researched stocks and focus on these stocks.


How to Select the Best Stocks to Buy


I have already explained in my previous tutorials how to do study and research to select the best stocks to buy. Below are some more tips to help you select the best stocks:
Portfolio Management
  1. If a company is coming up with a dynamic new product or services and the product or services has great demand then the stock can be very active. Focus of these stocks.
  2. Focus on top performing sectors and buy shares of top performing stocks. Don't buy stocks that look cheap. Remember, it is quality that matters and not the quantity.
  3. Keep track on well performing mutual funds and see where are they are investing.
  4. Keep an eye on outstanding stocks and stocks that make new highs and volume. Look for opportunities when these stocks break their high prices and then buy these stocks.
  5. Understand market trends and then select your stocks.
  6. Sudden or unusual price fluctuation is not any signal to buy. Don't buy blindly on market dips. Use your brain and do research before buying any stock.
 How Many Stocks Should I Add To My Portfolio

    Budget ($)
    Number of Stocks to Buy
    < 20,000 1 to 2 stocks
    20,000 to
    50,000    		 2 to 3 stocks
    50,000 to 200,000 3 to 5 stocks
    200,000 to
    500,000    		 5 to 7 stocks
    > 500,000 7 to 10 stocks

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    Quality of Stocks Vs Quantity of Stocks

    Most new investors to stock market buy shares that cost less. What they don’t understand is that it is quality of stocks that matters and not the quantity. You can buy thousands of cheap stocks with your savings but you won’t make any profit with these stocks. Real money is made from good quality of stocks when held for a long time.

    How to Buy & Sell Shares

    How to Buy & Sell Shares

    Most investors with limited money think that they should buy more cheap shares than fewer high quality expensive shares. This is completely wrong approach to share market investment. The problem with cheap shares is that they don’t go up. Neither such companies pay good dividend. Also such shares are very difficult to sell at profit.

    Most share trading experts and stock market professionals will advice to buy shares of a good company even if it costs more. Diversify your portfolio with good stocks. You decrease your risks and increase your chances of making profit with good quality stocks. It is also important to allocate enough time to the stock to grow.

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    Share Market Panic - What to Do? Buy, Sell, Hold?

    There is panic in the share market. Prices are going down and you are making loss. What to do now? Buy, Sell or Hold shares? Please suggest. These are some of the questions that most investors ask.

    Here are some proven tips to follow when there is  great panic and volatility in the market.


    Assuming that you have done all study and research in selecting stocks, there is no need to panic when there is great volatility in the share market or even if your stock is making loss. The point to remember here is that a company and its stock in the stock market are two different identities. Stocks can rise or fall with volatility and bad news. But a good company with good fundamentals and strong top management will have little to no impact. Stock market and a company work on different principles. A good company will always try to grow. Do not get panicked with huge downfall in the share market or on bad news.
    Share Market Panic

    You need to understand the present health of the company that you invested in. Do further research. Try to understand why the prices of the stock are going down. If there is uncertainty and volatility in the market, fear will prevail. This is human nature. Sudden downfall in the stock market is not the end of the world. Good companies have very strong fundamentals but they are sometimes washed away with bad market emotions.

    Never sell off your stock in this situation and book loss. Instead, contact the “Investor Relations” Department of the company and ask following questions:
    • Why is there sudden downfall in your stock prices? Are there any bad news or rumors?
    • What is the company doing about the situation?
    • What are company shareholders and employees doing with their shares? Are they buying, selling or holding the stock?
    • Is the company buying its own shares?
    With all the answers, you will get a clear picture of the situation that will help you what to do – Buy, Sell or Hold the Stock.

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    Using Value, Growth, Income & GARP for Stock Analysis

    When doing stock analysis to buy shares, investors should also focus on Growth At A Reasonable Price (GARP), Growth, Value and Income of a company.

    Value Stocks – There could be stock that may have been underestimated or overlooked by other investors. These stocks can have values. Maybe prices of these stocks have gone down because of some bad news or event or maybe the stock falls in a sector that is underestimated by most investors. You must remember that the company possesses fixed assets like land and buildings, inventories, subsidiaries etc. These assets have value. Value investors will understand the potential of the stock and invest or hold its shares until the rest of the market realizes the actual value of the assets of the company. Companies like Templeton Mutual funds often practice this strategy.

    Valuing Stocks
    Growth Stocks – Here the strategy is to buy stocks that have great growth and earning potential. Investors must target companies that are growing faster than its competitors. Such companies pay little to no dividend and reinvest their profit to grow their business. These are long-term investment because companies need time to grow. Short-term investors can avoid these stocks.

    Income – Investors buy stocks for two reasons – to sell at higher rates and to get income via dividends. Investors interested in regular income through dividend can pay high dividends.

    GARP - Growth at a Reasonable Price (GARP) combines the features of both growth investing and value investing. GARP investors look for companies that are showing at consistently at reasonable rate. GARP is considered to be the best investment strategy.

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    Fundamental Analysis of a Company

    Analyzing the financial status, management, growth potential, market share and other fundamentals is called fundamental analysis of a company. In simple words, Fundamental Analysis of a company is study of basic fundamentals of a company that can decide its future and growth.

    Different companies compete within a industry. A company can fall in the category of a very attractive industry or sector but this is not a guarantee that the company will succeed. There are several examples where an industry is doing will but some companies within that sector is not doing well. On the other hand, there are examples where a company that fall under a poorly performing sector but the company is growing well and making profits.

    When doing financial analysis of a company, investors must look at both financial and non-financial aspects. Some of the points to consider while doing fundamental analysis of a company are as follows:
    Fundamental Analysis of a Company
    • Company history and its line of business.
    • Product of the company and market demand for those products.
    • Market Share.
    • Top management of the company.
    • Patents and trademarks of the company.
    • Partnership with other companies.
    • Competition with other similar companies.
    • Future business plans and projects.
    • Market Cap – small, medium or large.
    • Volume of trade in stock exchange for the scrip.
    • Earnings-per-Share.
    • P/E ratio.
    • Growth in the past in terms of sales and profit.

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    Price-To-Earnings Ratio (P/E Ratio)

    Price-To-Earning-Ratio (P/E Ratio) = Current Price of a Stock ÷ Annual Net Income Per Share.


    Price-to-Earning ratio helps an investor to decide the correct current value of a stock and how cheap or expensive the stock is. 

    Example – If current price of X company is $ 100 per share and Earning per Share (EPS) is $ 10, then P/E $ 10. 

    If a company earn more per share, the value of it’s share will increase. A stock with high PE ratio can be considered as overvalued and is not worth buying. Good stocks will have a low P/E ratio.
    Companies normally price their shares based on its future expected growth. For e.g. if a company is earning $ 1 per share and is expecting a growth of 20% per Annum or $ 2 per share, then it will price its shares accordingly.

    Price-To-Earnings Ratio (P/E Ratio)
    In simple words, shares are priced at future expected growth of a company. Investors have to pay for future expected earnings of the company. This is where the risks lie. If something goes wrong with the company and it is not able to grow at the expected rate, then prices of its shares will not rise. Also the company will not give expected dividend.

    When selecting a stock to buy, it is important to compare present and past P/E ratio of a company. This will give idea if the stock is overvalued or not. Investors must only buy stocks of reasonable P/E ratio. If the fundamentals of a company is very strong with top quality management and high expected growth, then it is wise to invest in the company even if the shares P/E ratio is high.

    Resources & References:

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