Beginner's Guide to Investment in Equity Shares

There is no doubt that 'happiness' leads to a happy life but "happiness" is perhaps the most confusing and misunderstood expression in the world. Its definition is never same for everyone and surprisingly it never remains same to a same individual, forever. A sick person considers 'health' as the real wealth. A young man may not consider so; rather believes that a good pay rise or more income can buy more happiness in life. Unfortunately, his conception on happiness keeps changing as the time changes. A person in a disastrous marriage considers magic of happiness lies in happy married life. A blind person sheds tears as he is devoid of every exquisiteness of the planet he lives in, while most others with beautiful lively eyes prefer keeping them shut rather than viewing this aggressive brutal world. So the question remains unanswered: what makes one happy? Is it a huge regular extra income? A Rolls Royce with a Palm Beach residence or 10,000 Facebook followers or is it a good family and company of good friends? Is there any happiness formula especially one that is statistically and scientifically credible?

What we always fail to notice that the main reason for unhappiness or no-happiness is because many of us aren't satisfied with how much we have now. We are constantly expecting a raise at work, more income, befriending rich aged relatives and regardless of long odds, spending on lottery tickets and many more options to buy more happiness with more income. What we all miss and overlook is an eternal fact that 'real happiness' lies in utmost contentment. To be happy means to be content in whatever you have, in whatever you do, in whomever you are with, happiness lives within ourselves. If you consider this long speech of mine is a bit pessimistic, ambitionless, well, then now is the right time to shift our focus to the topic that I wish to speak about.

We are never happy with our incomes; always looking for more avenues to earn extra income on the belief that more income will buy us more happiness. The main topic of our discussion is very simple-- how we can earn some extra income over our regular earnings by using our idle fund that we have saved so far or from our occasional surplus balances, no matter how little it is, if that can add more happiness to our lives, there is no harm in using it wisely.

Investment is associated with the work of good use of money to reap growth in future. Equity is one form of investment where you have maximum income and return potentials if you can act cautiously without any excessive greed, like a cool professional. It is the best way to grow your money magically provided you invest it very wisely, I must repeat, very wisely. Always remember that extra income is always associated with extra risks. We must cautiously compare the risks with income potentials and simultaneously look for ways to minimize risks in equity investments, as per our risk bearing capacities.

Today, we will talk about some tips that may help you to identify and pick the right stocks (it is the fully paid shares of a company) with minimum risk but with maximum income potentials. Investing in stock market does not essentially need a lot of money; you can do it with as much as you feel comfortable. If you can select a good company with solid financial structure (good fundamentals, revealed by its financial statements) with good business prospect and invest there with a long term horizon, say for 5 years or more, it is nothing surprising, if your money gets double or triple or more than that within a couple of years.

The experts recommend a company is safe to invest if it fulfills three criterions: firstly, it should be at least ten years old, has a consistent record of earning profit and paying dividend, and lastly, its shares are trading at a price 90% of its book value. However, for this, you should possess some basic knowledge and necessary skills to evaluate the soundness and growth prospect of a company in a particular sector with future growth potential within your time horizon.

There is another way to earn from equity as a short term trader in the stock market. A short term trader usually acts within a short span of time; buys at a dip, when the price is low and sells when the price is higher, and reaps the difference as profit. If you follow few simple steps you can earn extra income regularly. As a short term trader, you should concentrate on few selected high beta stocks (as it is safer and easy to track) rather than watching hundreds of company stocks listed in the stock market. Your selected stocks must be highly volatile and range bound-- fluctuate or move frequently within a price bracket. They prefer to move within a minimum and maximum limit. The minimum levels are popularly known as "support levels", every stock has many different support levels, if one slips another creeps in. Once these support levels are touched, the price of the stock, normally, keeps moving upward towards a higher level. These higher levels are called "resistance levels". Similar to 'support levels', every stock has many 'resistance levels'. A short term trader must maintain "stop-loss" to avoid loss from further fall. Once the price of a stock crosses a "resistance level", it becomes a new 'support level' for the stock. Likewise, when a support level breaks, it becomes a new resistance level of the stock.

The stock prices never change in any consistent manner. They move in irregular ups and downs movements depending on the performances, financial policies, market situations, mood the market and many other non-financial but stock-market related reasons (technical reasons). So, if you want to trade or invest in equity to earn more income regularly you must have good knowledge about 'support levels', 'resistance levels', 'stop-loss' and facts that reflect the soundness of a company. Likewise, you have to update yourself with the prospect and potential of all the sectors to select the proper soil for your investment. Some of the popular sectors to invest are medicine, information technology, infrastructure, finance, insurance, automobile, food and beverages, refineries, steel, etc. Identification of the right price to invest in a profitable stock is possible only on identifying the pattern of its price movements. You must find out and record its price movement over a large span of time-as long as you think it is justified for your analysis.

You should also keep records of past dividends, profits or earnings, ratio between price (market price) and earning (earnings per share in a period) or P/E (Price/ Earning Ratio) as it is popularly called, compare them with the peers and others within the sector. A higher P/E ratio indicates the price of the stock is considerably higher with respect to its income. Every sector has an average or standard P/E ratio. Compare your selected stock's P/E with the 'sector average' and peers to know its worth, whether or not it is overpriced. A higher P/E ratio often indicates that investors have much confidence on the prospect of the company. A lower P/E may not always be attractive, people may have less confidence on the prospect of the company. Use your prudence on the value judgment.

Every equity investor can predict the movements of a stock price more accurately if he learns to interpret its open interest data. "Open Interests" are opened or yet to settled contracts or outstanding contracts at any point of time.

Open interests are those contracts that have not yet been exercised (squared off), expired, or fulfilled by delivery. The positions of open interest are reported every day to represent the increases or decreases in the number of contracts for that day, and it is shown as a positive or negative number. A rise in open interest or outstanding contracts in futures contracts along with its price indicates bullishness, which means that the investors are creating long positions, expecting price rise in future. Declining open interest with reducing price means that the market is liquidating and implies that the prevailing price trend is coming to an end and a price rise is expected.

By monitoring the changes in the open interest figures, you may conclude to form an opinion based price on the confirming indicator of open interest mentioned below.

Stock Price / Open Interest / Interpretation
Rising / Rising/ Price rise expected, Market is becoming stronger.
Falling / Falling / Market is consolidating, strengthening.
Rising / Falling / Market is weakening.
Falling / Rising / Market is weak.

These are the facts that you can learn easily from many online sites, you do not have to be a professional. Simple patience, determination and intelligence are everything that you need.

Hope your regular extra income from equity gives more happiness to your life.

at 10:06 PM
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