Anil Yadavrao Gaikwad
Published in Issue III, September 2013
Napoleon Hill in his book “Grow Rich with Peace of Mind” says “You have a great potential for success, but first you must know your own mind and live your own life – then you will find and enjoy that mighty potential. Become acquainted with your inner self and you can win what you want within a time limit of your own choosing. Certain special techniques help you win the goals of your dearest dreams, and every one of these techniques is easily within your power.” Taking clue from this quote we are going to discuss some of the techniques which might help you achieve your financial goals, may be in a shorter period of time. Some of my leftist friends hate stock market and they do not like making money from stock market as it is zero sum game. Somebody makes money and in the same transactions somebody might lose money. It may or may not be true.
However, we are going to discuss some of the basics of stock market operations for our readers. Mr. Robert Kiyosaki in his Book “Guide to Investing” deals with various aspects about investing by analysing what the rich invest in that the poor and middle class do not. If you are reading this article for hot investment tips, or how to get rich quick, or the secret investment formula of the rich, this article series is not for you. Sole objective of this article series is to educate you on investment science and some of the techniques applied in earning money in stock market.
In fact, there are few thousand pages available on internet for those who want to study how to invest and make money in stock market and these pages are written by many known investment gurus. Few thousand video talks and teachings are also easily available on the internet on stock market operations. In fact, today, if one wants to learn and master any subject, you just need an internet connection and a Laptop. Video Tutors and recordings are available on almost every subject under the Sun. The author is no way an investment expert, but having known a little bit of investment techniques, would like to share them with you.
Now, before we start discussing how we can grow our investment on stock market, one must understand that self study is the most important factor. Some of the suggested books are listed below:
- The Intelligent Investor by Benjamin Graham,
- Security Analysis by Benjamin Graham and David L Dodd,
- Guide to Investing by Robert T Kiyosaki
- Technical Analysis Explained by Martin J Pring.
- Common Stocks and Uncommon Profits (and other writings) by Philip Fisher.
- One up on Wall Street by Peter Lynch, etc.
As we progress in this series, I will introduce other books which are for advance studies.
History has shown that owning stocks is one of the easiest and most profitable ways to grow your wealth over the long-term. Virtually every member of the Billionery club today got there because they own a large block of shares in a public sector or private sector companies, ranging from manufacturing and oil drilling to cosmetics and Banking Sector. All the richest Indians are called rich because of valuation of their stock and not because physically they have so much money. There is nothing wrong in acquiring wealth. Although your beginning may be humble, this article series help you to make money from investing in stock market by minimizing the risk of losing money. It is needless to say that every investment is associated with certain risk and author does not guarantee that your money will be safe. So this article series is merely an awareness creating efforts and not a guide. In fact, if you are not mentally prepared to lose money in stock market, this article series is not for you and you should not invest your hard earned money in stock market. You should invest money in Bank Fixed Deposits and other government securities such as bonds where they will get assured returns over a period of time as decided by Reserve Bank of India (RBI) from time to time.
Presently, the returns on long term investment basis has been higher in the property investments, however, historically, stock market has given better returns compared to other investments such as property, Gold, Fixed Deposit etc. One of the advantages in investing in stock is that you can start investment with few thousand rupees where as the investment in property requires large sum of money which may not be possible for everyone.
While we assume that you are going to read the above suggested books, many terms of the stock market vocabulary can be learned from these books. We will see some of the terms in order to have basic common understanding of the terms which we are going to refer in this article series.
What is Stock or Shares?
Shares or Stock Represent Pieces of a Business
Imagine you wanted to start a retail store with members of your family. You have decided that you need Rs. 100,000 to get the business off the ground so you incorporate a new company. You divide the company into 1,000 pieces, or “shares” of stock. (They are called Shares because each piece of stock is entitled to a proportional share of the profit or loss). You price each new share of stock at Rs. 100. If you can sell all of the shares to your family members, you should have the Rs. 100,000 you need (1,000 shares x Rs. 100 contributed capital per share = Rs 100,000 cash raised for the company).
If the store earned Rs. 50,000 after taxes during its first year, each share of stock would be entitled to 1/1000th of the profit. You’d take Rs 50,000 and divide it by 1,000, resulting in Rs. 50.00 earnings per share (or EPS as it is often called). You could call a meeting of the company’s Board of Directors (these are the people the stockholders elected to watch over their interest since they couldn’t run the business) and decide to use the money to pay cash dividends, repurchase stock, or expand the company by reinvesting in the retail store.
At some point, you may decide you want to sell your shares of the family retailer. If the company is large enough, you could trade on a stock exchange. That’s what is happening when you buy or sell shares of a company through a stock broker. You are telling the market you are interested in acquiring or selling shares of a certain company and Stock Exchange matches you up with someone and takes fees and commissions for doing it. Alternatively, shares of stock could be issued to raise Lakhs or Crores of rupees for expansion.
The Two Ways You Make Money
Now that you see this, it’s easy to understand that your wealth is built in two distinct ways:
- An increase in share price. Over the long-term, this is the result of the market valuing the increased profits as a result of expansion in the business or share repurchases, which make each share represent greater ownership in the business as a percentage of total equity. In other words, if a business with a Rs. 10 stock price grew 20% for 10 years through a combination of expansion and share repurchases, it should be nearly Rs. 620 per share within a decade as a result of these forces assuming Stock Market maintains the same price-to-earnings ratio.
- Dividends. When earnings are paid out to you, these funds are now your property in that you can either use them to buy more stock or use money for some other purpose.
Occasionally, during market ups and downs, you may have the opportunity to make a profit by selling to someone for more than the company is worth. In the long-run, however, the investor’s returns are inextricably bound to the underlying profits generated by the operations of the businesses which he or she owns stocks in.
We have just begun our journey in understanding the stock market operations. We will continue our article in next issue. However, those who are seriously interested in understanding the stock market in details can write to me at aygaikwad@gmail.com.
By the time our next issue reaches you, I am sure the serious reader will have at least read one book from the suggested reading list above. I suggest that serious readers should read The Intelligent Investor by Benjamin Graham before you get next issue of Buddhist Voice. The Intelligent Investor was first published in 1949. Benjamin Graham was not only one of the best investor who ever lived on the earth; he was also the greatest practical investment thinker of all the times. The Intelligent Investor is the first book ever to describe for individual investors, the emotional framework and analytical tools that are essential to financial success. Till date, this book remains the single best book on investment ever written for general public. Graham developed his core principles, which are at least as valid today as they were during his life time. Some of our reluctant readers can even listen to this book on You Tube by following links:-
The Intelligent Investor Part -1: https://www.youtube.com/watch?v=xIOstH-V09s
The Intelligent Investor Part -2: https://www.youtube.com/watch?v=P9VTI434bhk
The Intelligent Investor Part -3: https://www.youtube.com/watch?v=tsgMRTGsfJ0