Stock Market Speculation

Stock Market Speculation:

 

Our discussion on investing in the previous article brings us to our next topic which is ‘Speculation’.

 

So what exactly is speculation?

Speculation in laymen’s term simply means buying of an investment vehicle for a particular duration of time (usually for less than a year) to simply profit from the price movements of that investment vehicle.

 

Does speculation only happens in stock market?

The answer is big fat “NO”.

Speculation is everywhere, it’s all around us and yet people link it to market changes.

Many people speculate in many fields unknowingly and end up losing their hard earned money.

The main areas of speculation are stock markets (you already knew that…right), so basically it happens with bonds, commodities, currencies, collectibles, real estate, futures, options etc…

 

Let’s take a very simple example that we use in our daily lives.

Suppose you buy a house or a land ground, since the real estate market is in boom, and want to make good money by selling it when the prices go up.

This becomes speculation, if you buy the property at high valuations just because the markets are going up.

 

What would you do if the real estate prices dropped or even worse, if you had bought the property using a loan?

This kind of speculation is what causes great losses that you hear among people in stock market and other areas.

 

Keep in mind that speculation is good if you know what you are doing and you have a high expertise in the field you are speculating about.

We will talk more about speculation and its types in the coming articles so bare with me on http://www.basicsstockmarket.blogspot.com  and keep track of the previous and upcoming articles on it.

Stock Market Speculation

Stock Market Investing - What is investing

Stock Market Investing - What is investing?

Many people keep on hearing about investing in the local newspapers, TV channels and financial papers, magazines, on the internet and in other social mediums of communication.

Yet people don’t know exactly what investing really is.

You may have heard that investors lost billions of dollars in bad deals or that investor’s book high profits every day.

In today’s economy, people are confused between investing, so they speculate alot.

Speculation is predicting the movement of market in short term i.e. it may be for the coming day, week or month, even a year from now.

Investing on the other hand is analysing a business as if you were the owner of that same business (actually, when you buy shares, you are the owner) and see if the business is worth buying or not.

Investors, after buying a business, don’t see changes in the daily stock prices every day, instead, they just sit and wait as the business grows, since they believe that if the business is fundamentally growing, the prices of the shares will automatically rise with the business.

Some may wonder, ‘Fundamentals, what the hell is that?’

Fundamental of a business is a very vast topic in itself and so I may not be able to cover it here in this article but I will surely explain in more details in more articles to come.

In short a fundamentally good business is the one whose sales, margins and profits rise in time.

The usual period that an investor holds the stock ranges from 3 years to decades, being 3 years the bare minimum (unless the fundamentals of the business changes drastically and stock prices go down).

There are other tools available in the market that people use to make money in stock market. They are the so called sophisticated tools……also known as derivatives.

These have been called as the “weapons of mass destruction” by supposedly world’s greatest investor of Omaha ‘Warren Buffett’.

Yet I believe that a person can make the odds turn into his favour if done correctly, and turn these so called “weapons of mass destruction” into “weapons of mass profits”.

I’ll talk to you about them later in the following articles. Feel free to participate and comment.

Basics of Stock Market

The Basics of Stock Market Investing:

Financial markets provide their participants with the most favorable conditions for purchase/sale of financial instruments they have inside. Their major functions are: guaranteeing liquidity, forming assets prices within establishing proposition and demand and decreasing of operational expenses, incurred by the participants of the market.

 

Financial market comprises variety of instruments; hence its functioning totally depends on instruments held. Usually it can be classified according to the type of financial instruments and according to the terms of instruments' paying-off.

 

Stock market as it was mentioned before, ordinary shares' purchasers typically invest their funds into the company-issuer and become its owners. Their weight in the process of making decisions in the company depends on the number of shares he/she possesses. Due to the financial experience of the company, its part in the market and future potential shares can be divided into several groups.

 

·         Blue Chips Shares of large companies with a long record of profit growth, annual return over $4 billion, large capitalization and constancy in paying-off dividends are referred to as blue chips.

 

·         Growth Stocks Shares of such company grow faster; its managers typically pursue the policy of reinvestment of revenue into further development and modernization of the company. These companies rarely pay dividends and in case they do the dividends are minimal as compared with other companies.

 

·         Income Stocks Income stocks are the stocks of companies with high and stable earnings that pay high dividends to the shareholders. The shares of such companies usually use mutual funds in the plans for middle-aged and elderly people.

 

·         Defensive Stocks These are the stocks whose prices stay stable when the market declines, do well during recessions and are able to minimize risks. They perform perfect when the market turns sour and are in requisition during economic boom.

 

These categories are widely spread in mutual funds, thus for better understanding investment process it is useful to keep in mind this division.

 

Shares can be issued both within the country and abroad. In case a company wants to issue its shares abroad it can use American Depositary Receipts (ADRs). ADRs are usually issued by the American banks and point at shareholders' right to possess the shares of a foreign company under the asset management of a bank. Each ADR signals of one or more shares possession.

 

When operating with shares, aside of purchase/sale ratio profits, you can also quarterly receive dividends. They depend on: type of share, financial state of the company, shares category etc.

 

Ordinary shares do not guarantee paying-off dividends. Dividends of a company depend on its profitability and spare cash. Dividends differ from each other as they are to be paid in a different period of time, with the possibility of being higher as well as lower. There are periods when companies do not pay dividends at all, mostly when a company is in a financial distress or in case executives decide to reinvest income into the development of the business. While calculating acceptable share price, dividends are the key factor.

 

Price of ordinary share is determined by three main factors: annual dividends rate, dividends growth rate and discount rate. The latter is also called a required income rate. The company with the high risks level is expected to have high required income rate. The higher cash flow the higher share prices and versus. This interdependence determines assets value. Below we will touch upon the division of share prices estimating in three possible cases with regard to dividends.

 

While purchasing shares, aside of risks and dividends analysis, it is absolutely important to examine company carefully as for its profit/loss accounting, balance, cash flows, distribution of profits between its shareholders, managers' and executives' wages etc. Only when you are sure of all the ins and outs of a company, you can easily buy or sell shares. If you are not confident of the information, it is more advisable not to hold shares for a long time (especially before financial accounting published).

3 Huge Mistakes investors make when trading on the stock market

3 Huge Mistakes investors make when trading on the stock market - Basic of Stock Market Investing:

 

·         Do not buy what the news media tells you to. Too many people will buy stocks based on what they heard on CNN last night. This type of investing is risky. You should always decide for yourself with stock is the best pick.

 

·         Do not buy what a friend tells you is the next hot pick. This can be even more dangerous than relying on the news to make your investment decisions.

 

·         Do not overtrade. This is a mistake many professional traders will make. They will have developed a system that turned their $30,000 into $100,000 in 1 year. Then the market changes. They continue to trade their same way and lose it all in the next 2 months. When money is not easy to make in the markets do not trade because you will probably lose what you have now.