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Sunday, March 21, 2010

What are Stocks?

Issuing and selling shares of stock is a common method corporations use to raise capital in order to carry out the goals of the company, such as expansions and improvements, without borrowing large amount of money. Without the income generated by the sale of shares of stock, many companies would not be able to come up with the cash to accomplish these goals.

Sometimes corporations sell shares of stock simply because the owners want to reduce their holdings in the company and generate cash for personal use.

When you own stock, you actually own part of the company, and the value of your shares goes up and down as the company's stock value fluctuates. It's important to remember that when stock prices go down, you don't actually lose anything unless you sell the stock while the price is lower than what you paid for it. As long as you hold onto the stock, you can recoup any "notional" losses the next time the stock price rebounds (assuming that it does).

Stock prices often have more to do with investor's perceptions than with the actual financial standing of the company. During peak of bull run (Jan 2008) some real estate companies stocks, for example, started trading at above thousand Rs per share but then settled down into less than 100 Rs per share after the market crash.

Stocks don't offer a guaranteed return, so choose them carefully.

A Financial Stock Analyst looks at many parameters while evaluating individual stock and choosing it for investment, basic factor includes dividend track record & dividend yield, CAGR (Compounded Annual Growth Rate), EPS (Earning per Share), PE ratio (Price:Earning), share holding patterns, past performance (6-8 last quaterly results), etc.    

Each publicly traded stock is usually traded on just one of the Indian or international stock indexes. In India, the best known index is the Sensex, but only 30 stocks are included on this exchange. You could have investments in a hundreds of stocks and not be directly affected by rises and falls in the Sensex, if your stocks are traded on other exchanges.