This is a question every beginer wants an answer for. A lot of first timers invest in the stock markets because they have seen others especially friends, family, relatives, colleagues etc make fortunes. Jumping in involves a lot of risk. One must appreciate the pros and cons of investing in stocks and needs to understand the basics to not lose hard earned money.
Typically, stock market investing is better than placing your funds in fixed deposits in a bank.
1. Capital Gains: Stocks appreciate in value an you can exit anytime you want without breaking the FD and getting penalised. You can own a stock for as long as you want. typically, you will have to pay commission twice i.e. both at the time of buying and selling. There is no Capital Gains Tax in some countries including Pakistan. If you buy 100 shares of OGDC at Rs 50 per share and invest Rs 5,000 and sell the shares when the price touches Rs 60, you will make a gross gain of 1,000 which is 20% return on investment. You will however incur brokerage and government fee at the time of buying and selling so you can assume a net gain of 18%. In Pakistan, there is no Capital Gains Tax so all the gains are for you.
2. Dividends: Good stocks bear dividends on a quarterly, half yearly or annual basis. Here is a chance to make income on a regular basis. A careful investor will invest in high yielding stocks. for example. OGDC gives Dividends on a quartely basis and on current stock price offers annualised dividend of 13%. Again, this is much better than the FD.
3. Bonus Shares: Some companies issue bonus shares to the investors. Bonus shares are generally issued when the company wants to reinvest the profits made in a year for expansion. Accordingly, it will either not pay dividend or pay a potion of earnings as dividend. The bonus shares when sold at market price will earn a decent gain.
The investors do need to realise that high returns often come with high risks. The stock market is a volatile market and it does not continuously adopt an upward trend. the investors need to understand and adopt stop loss mechanism, although in Pakistan the stop loss is not that effective. Here you need to give a price range and hope that your stop loss will trigger.
A good investor will first develop an understanding into the scripts and choose to invest in stocks which are relatively safe and offer high dividend yield. Also, please never put all your eggs in one basket by spending all your money on buying only one stock. You must have a diversified portfolio of good shares from 3 or more industries. It only helps!
Importantly, do not go all out and invest all your money in one day on buying shares at a certain price. Adopt a tier buying system by establish buying levels. e.g. if you have Rs 100,000 and you want to buy OGDC shares which is say trading at Rs 50 then invest between 25% to 33% on that day at that price. When the OGDC share goes up say by Rs 5 then invest 10% more in the script.
Do you know what OGDC does? you must know what the company is all about, what are its future plans, what are the analysts' recommendations for this stock, what is the history of profits and dividends and importantly what are the next 3 years profit forecasts.
Never jump into buying a share, just because your next door neighbour is doing it!
If you have any questions or comments, please let me know.
Happy investing!
Typically, stock market investing is better than placing your funds in fixed deposits in a bank.
1. Capital Gains: Stocks appreciate in value an you can exit anytime you want without breaking the FD and getting penalised. You can own a stock for as long as you want. typically, you will have to pay commission twice i.e. both at the time of buying and selling. There is no Capital Gains Tax in some countries including Pakistan. If you buy 100 shares of OGDC at Rs 50 per share and invest Rs 5,000 and sell the shares when the price touches Rs 60, you will make a gross gain of 1,000 which is 20% return on investment. You will however incur brokerage and government fee at the time of buying and selling so you can assume a net gain of 18%. In Pakistan, there is no Capital Gains Tax so all the gains are for you.
2. Dividends: Good stocks bear dividends on a quarterly, half yearly or annual basis. Here is a chance to make income on a regular basis. A careful investor will invest in high yielding stocks. for example. OGDC gives Dividends on a quartely basis and on current stock price offers annualised dividend of 13%. Again, this is much better than the FD.
3. Bonus Shares: Some companies issue bonus shares to the investors. Bonus shares are generally issued when the company wants to reinvest the profits made in a year for expansion. Accordingly, it will either not pay dividend or pay a potion of earnings as dividend. The bonus shares when sold at market price will earn a decent gain.
The investors do need to realise that high returns often come with high risks. The stock market is a volatile market and it does not continuously adopt an upward trend. the investors need to understand and adopt stop loss mechanism, although in Pakistan the stop loss is not that effective. Here you need to give a price range and hope that your stop loss will trigger.
A good investor will first develop an understanding into the scripts and choose to invest in stocks which are relatively safe and offer high dividend yield. Also, please never put all your eggs in one basket by spending all your money on buying only one stock. You must have a diversified portfolio of good shares from 3 or more industries. It only helps!
Importantly, do not go all out and invest all your money in one day on buying shares at a certain price. Adopt a tier buying system by establish buying levels. e.g. if you have Rs 100,000 and you want to buy OGDC shares which is say trading at Rs 50 then invest between 25% to 33% on that day at that price. When the OGDC share goes up say by Rs 5 then invest 10% more in the script.
Do you know what OGDC does? you must know what the company is all about, what are its future plans, what are the analysts' recommendations for this stock, what is the history of profits and dividends and importantly what are the next 3 years profit forecasts.
Never jump into buying a share, just because your next door neighbour is doing it!
If you have any questions or comments, please let me know.
Happy investing!
I agree with your comments! In today's economy, "Small is the new big, Sustainable is the new growth. Trust is the new competitive advantage."
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