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How to make money in the stock market

Inroduction
This article is a COMPLETE guide to the basics of making money in the stock
market! If you are considering investing in the stock market, you MUST read
this article! We have explained all the concepts and talked about all the "myths"
!that people have about the stock market
:What are stocks? Definition
.Plain and simple, a stock is a share in the ownership of a company
A stock represents a claim on the company's assets and earnings. As you acquire
.more stocks, your ownership stake in the company becomes greater
Note: Some times different words like shares, equity, stocks etc. are used. All
.these words mean the same thing
?So what does ownership of a company give you
Holding a company's stock means that you are one of the many owners
(shareholders) of a company and, as such, you have a claim to everything the
.company owns
This means that technically you own a tiny little piece of all the furniture, every
trademark, and every contract of the company. As an owner, you are entitled to
.your share of the company's earnings as well
These earnings will be given to you. These earnings are called dividends and
.are given to the shareholders from time to time
A stock is represented by a "stock certificate". This is a piece of paper that is
proof of your ownership. However, now-a-days you could also have a demat
account. This means that there will be no stock certificates. Everything will be
done though the computer electronically. Selling and buying stocks can be done
.just by a few clicks
Being a shareholder of a public company does not mean you have a say in the
day-to-day running of the business. Instead, one vote per share to elect the
board of directors of the company at annual meetings is all you can do. For
instance, being a Microsoft shareholder doesn't mean you can call up Bill Gates
.and tell him how you think the company should be run
The management of the company is supposed to increase the value of the firm for
shareholders. If this doesn't happen, the shareholders can vote to have the
management removed. In reality, individual investors like you and I don't own
enough shares to have a material influence on the company. It's really the big
boys like large institutional investors and billionaire entrepreneurs who make
.the decisions
For ordinary shareholders, not being able to manage the company isn't such a
big deal. After all, the idea is that you don't want to have to work to make money,
right? The importance of being a shareholder is that you are entitled to a portion

.of the companys profits and have a claim on assets

Profits are sometimes paid out in the form of dividends as mentioned earlier. The
more shares you own, the larger the portion of the profits you get. Your claim on
assets is only relevant if a company goes bankrupt. In case of liquidation, you'll
.receive what's left after all the creditors have been paid
Another extremely important feature of stock is "limited liability", which means
that, as an owner of a stock, you are "not personally liable" if the company is not
.able to pay its debts
In other legal structures such as partnerships, if the partnership firm goes
bankrupt the creditors can come after the partners personally and sell off
their house, car, furniture, etc. To understand all this in more detail you could
.read our How to incorporate? article
Owning stock means that, no matter what happens to the company, the
maximum value you can lose is the value of your stocks. Even if a company of
which you are a shareholder goes bankrupt, you can never lose your personal
.assets
Why would the founders share the profits with thousands of people when they
could keep profits to themselves? This is the obvious question that comes up
!next. This what the next section is all about

?Why does a company issue stocks

Why would the founders share the profits with thousands of people when they
could keep profits to themselves? The reason is that at some point every
company needs to "raise money". To do this, companies can either borrow it
from somebody or raise it by selling part of the company, which is known as
.issuing stock
A company can borrow by taking a loan from a bank or by issuing bonds. Both
methods come under "debt financing". On the other hand, issuing stock is called
equity financing. Issuing stock is advantageous for the company because it
does not require the company to pay back the money or make interest payments
.along the way
All that the shareholders get in return for their money is the hope that the shares
will someday be worth more than what they paid for them. The first sale of a
stock, which is issued by the private company itself, is called the initial public
.offering (IPO)
It is important that you understand the distinction between a company financing
through debt and financing through equity. When you buy a debt investment
such as a bond, you are guaranteed the return of your money (the principal)
.along with promised interest payments
This isn't the case with an equity investment. By becoming an owner, you assume
the risk of the company not being successful - just as a small business owner isn't

guaranteed a return, neither is a shareholder. Shareholders earn a lot if a

company is successful, but they also stand to lose their entire investment if the
.company isn't successful
!Its a tricky game
Note that: There are no guarantees when it comes to individual stocks. Some
companies pay out dividends, but many others do not. And there is no obligation
to pay out dividends. Without dividends, an investor can make money on a stock
.only through its appreciation of the stock price in the open market
On the downside, any stock may go bankrupt, in which case your investment is
.worth nothing
Having understood this, we now want to know what makes stock prices rise and
fall? If we know this, we will know which stocks to buy. In the next section we
.will try to understand what makes stock prices go up and down

?"What makes stock prices go "up" and "down

Stock prices change every day because of market forces. By this we mean that
stock prices change because of supply and demand. If more people want to buy
!a stock (demand) than sell it (supply), then the price moves up
Conversely, if more people wanted to sell a stock than buy it, there would be
greater supply than demand, and the price would fall. (Basics of economics!)
Understanding supply and demand is easy. What is difficult to understand is
what makes people like a particular stock and dislike another stock. If you
understand this, you will know what people are buying and what people are
selling. If you know this you will know what prices go up and what prices go
!down
To figure out the likes and dislikes of people, you have to figure out what news is
positive for a company and what news is negative and how any news about a
.company will be interpreted by the people
The most important factor that affects the value of a company is its earnings.
Earnings are the profit a company makes, and in the long run no company can
survive without them. It makes sense when you think about it. If a company
never makes money, it isn't going to stay in business. Public companies are
.required to report their earnings four times a year (once each quarter)
Dalal Street watches with great attention at these times, which are referred to as
earnings seasons. The reason behind this is that analysts base their future value
.of a company on their earnings projection
If a company's results are better than expected, the price jumps up. If a
company's results disappoint and are worse than expected, then the price will
.fall
Of course, it's not just earnings that can change the feeling people have about a
stock. It would be a rather simple world if this were the case! During the

dotcom bubble, for example, the stock price of dozens of internet companies
rose without ever making even the smallest profit. As we all know, these high
stock prices did not hold, and most internet companies saw their values shrink to
a fraction of their highs. Still, this fact demonstrates that there are factors other
.than current earnings that influence stocks
So, what are "all the factors" that affect the stocks price? The best answer is that
nobody really knows for sure. Some believe that it isn't possible to predict how
stock prices will change, while others think that by drawing charts and looking
at past price movements, you can determine when to buy and sell. The only thing
.we do know is that stocks are volatile and can change in price very very rapidly
Just remember this: At the most fundamental level, supply and demand in the
.market determines stock price
There are many types of techniques and methods that investors use to figure out
whether a stock price will go up or down! We will try to give you an introduction
.to these techniques in this article
But before we go into the concepts of stocks picking, and the techiques of
....analysis, let us understand one last basic thing

?What are the Sensex & the Nifty

The Sensex is an "index". What is an index? An index is basically an indicator. It
gives you a general idea about whether most of the stocks have gone up or most
.of the stocks have gone down
.The Sensex is an indicator of all the major companies of the BSE
.The Nifty is an indicator of all the major companies of the NSE
If the Sensex goes up, it means that the prices of the stocks of most of the major
companies on the BSE have gone up. If the Sensex goes down, this tells you that
.the stock price of most of the major stocks on the BSE have gone down
Just like the Sensex represents the top stocks of the BSE, the Nifty represents the
.top stocks of the NSE
Just in case you are confused, the BSE, is the Bombay Stock Exchange and the
NSE is the National Stock Exchange. The BSE is situated at Bombay and the
NSE is situated at Delhi. These are the major stock exchanges in the country.
There are other stock exchanges like the Calcutta Stock Exchange etc. but they
are not as popular as the BSE and the NSE.Most of the stock trading in the
.country is done though the BSE & the NSE
Besides Sensex and the Nifty there are many other indexes. There is an index that
gives you an idea about whether the mid-cap stocks go up and down. This is
.called the BSE Mid-cap Index. There are many other types of indexes
There is an index for the metal stocks. There is an index for the FMCG stocks.

There is an index for the automobile stocks etc. If you are interested in knowing
how the SENSEX is actually calculated...you must check-out our "How to
!calculate BSE SENSEX?" article

?How to calculate BSE SENSEX

Requested by: Lt Col Ashis Kumar Mishra
This article explains how the value of the BSE Sensex or sensitive index is
calculated. If you are not sure what we mean by the Sensex or what the Sensex is
all about, you can find this out by reading our How to make money in the stock
.market? article
The Sensex has a very important function. The Sensex is supposed to be an
indicator of the stocks in the BSE. It is supposed to show whether the stocks are
.generally going up, or generally going down
To show this accurately, the Sensex is calculated taking into consideration stock
prices of 30 different BSE listed companies. It is calculated using the free-float
market capitalization method. This is a world wide accepted method as one of
.the best methods for calculating a stock market index
Please note: The method used for calculating the Sensex and the 30 companies
that are taken into consideration are changed from time to time. This is done to
make the Sensex an accurate index and so that it represents the BSE stocks
.properly
To really understand how the Sensex is calculated, you simply need to
understand what the term free-float market capitalization means. (As we said
earlier, the Sensex is calculated on basis of the free-float market capitalization
method) But, before we understand what free-float market capitalization
.means, you first need to understand what market capitalization means

?"What is "market capitalization

You probably think that you have never heard of the term market
capitalization before. You have! When you are talking about mid-cap, small!cap and large-cap stocks, you are talking about market capitalization
Market cap or market capitalization is simply the worth of a company in terms
of its shares! To put it in a simple way, if you were to buy all the shares of a
particular company, what is the amount you would have to pay? That amount is
!called the market capitalization
To calculate the market cap of a particular company, simply multiply the
current share price by the number of shares issued by the company! Just to
give you an idea, ONGC, has a market cap of Rs.170,705.21 Cr (when this
article was written)
Depending on the value of the market cap, the company will either be a mid-

cap or large-cap or small-cap company! Now the question is, how do YOU
calculate the market cap of a particular company? You dont! Just go to a
website like MoneyControl.com and look up the company whose market cap you
are interested in finding out! The figure in front of Mkt. Cap will be the
.market cap value
Having seen what market cap is and how to find out the market cap of a
particular company, let us try to understand the concept of free-float market
cap

?"What is "free-float market capitalization

Many different types of investors hold the shares of a company! The Govt. may
hold some of the shares. Some of the shares may be held by the founders or
!directors of the company. Some of the shares may be held by the FDIs etc. etc
Now, only the open market shares that are free for trading by anyone, are
called the free-float shares. When we are calculating the Sensex, we are
!interested in these free-float shares
A particular company, may have certain shares in the open market and certain
.shares that are not available for trading in the open market
According the BSE, any shares that DO NOT fall under the following criteria,
:can be considered to be open market shares
Holdings by founders/directors/ acquirers which has control element
"Holdings by persons/ bodies with "controlling interest
Government holding as promoter/acquirer
Holdings through the FDI Route
Strategic stakes by private corporate bodies/ individuals
Equity held by associate/group companies (cross-holdings)
Equity held by employee welfare trusts
Locked-in shares and shares which would not be sold in the open market
.in normal course
A company has to submit a complete report about who has how many of the
companys shares to the BSE. On the basis of this, the BSE will decide the freefloat factor of the company. The free-float factor is a very valuable number!
If you multiply the "free-float factor" with the market cap of that company,
you will get the free-float market cap which is the value of the shares of the
!company in the open market
A simple way to understand the free-float market cap would be, the total cost
!of buying all the shares in the open market
So, having understood what the free float market cap is, now what? How do
you find out the value of the Sensex at a particular point? Well, its pretty
.simple
First: Find out the free-float market cap of all the 30 companies that make up
!the Sensex
!Second: Add all the free-float market caps of all the 30 companies

Third: Make all this relative to the Sensex base. The value you get is the Sensex
!value
The third step probably confused you. To understand it, you will need to
understand ratios and proportions from 5th standard mathematics. Think of it
:this way
Suppose, for a free-float market cap of Rs.100,000 Cr... the Sensex value is
4000
..Then, for a free-float market cap of Rs.150,000 Cr... the Sensex value will be

So, the Sensex value will be 6000 if the free-float market cap comes to
!Rs.150,000 Cr
Please Note: Every time one of the 30 companies has a stock split or a "bonus"
.etc. appropriate changes are made in the market cap calculations
Now, there is only one question left to be answered, which 30 companies, why
?those 30 companies, why no other companies
The 30 companies that make up the Sensex are selected and reviewed from time
to time by an index committee. This index committee is made up of
academicians, mutual fund managers, finance journalists, independent
.governing board members and other participants in the financial markets
:The main criteria for selecting the 30 stocks is as follows
Market capitalization: The company should have a market capitalization in the
Top 100 market capitalizations of the BSE. Also the market capitalization of
each company should be more than 0.5% of the total market capitalization of the
.Index
Trading frequency: The company to be included should have been traded on
each and every trading day for the last one year. Exceptions can be made for
.extreme reasons like share suspension etc
Number of trades: The scrip should be among the top 150 companies listed by
.average number of trades per day for the last one year
Industry representation: The companies should be leaders in their industry
.group
Listed history: The companies should have a listing history of at least one year

.on BSE
Track record: In the opinion of the index committee, the company should have
.an acceptable track record
.Having understood all this, you now know how the Sensex is calculated

But, before we go ahead and try to understand "How to make money in

the stock market?" you MUST read the next page....

!important things you must know and follow as an new investor 3

You need to KNOW some unforgettable basics before you enter the world of
investing in stocks. The stock market is a field dominated by savvy investors who
know the ins-and-outs of the market. For people who are not on the inside, the
: .stock market can be a VERY dangerous place
Don't even consider "tips" that tell you about "hot stocks". Consider the source:
There are many people in the market who put in all their time and effort in
promoting certain stocks. They do this because they have their money invested in
those stocks. If they can get enough people to buy the stock and they can get the
stock price to rise, they will sell the stock for a huge price, the stock price will
.crash and they will walk off to promote another stock
Always use your own brain: It's extremely important. You must always use your
own brain. Relying on the advice of others, no matter how well intentioned it
may be, is almost always a complete disaster. Make sure you dig in and really
examine the "facts about the companies" before you invest. Ignore press releases
.which have very little substance, and rely on "hype" to tell the company's story
!!!And finally the most important tip
Only invest money you can afford to lose!! Sure this is a basic point, but many
many people miss it. You should only invest money that you can honestly afford
to lose!! Everyone enters into investments with the idea of earning big profits,
but in many cases, this never works. (Especially if you are new to investing in the
stock market!)
Please understand that the above tips are tips for beginners. Once you really get
into the stock market you do not need to follow these rules anymore. But if you
.are a new investor, you MUST follow these rules. They are for your own safety
But then again, nothing comes free. Everything has a price. You will have to loose
some money, make some bad decisions and then only will you really understand
the market. You cannot understand the market by just looking at it from far. By
!following these rules, you will basically not loose too much

?Stock Picking - Which stocks to buy

Having understood all the basics of the stock market and the risk involved, now
we will go into stock picking and how to pick the right stock. Before picking the
.right stock you need to do some analysis
:There are two major types of analysis
Fundamental Analysis .1
Technical Analysis .2
Fundamental analysis is the analysis of a stock on the basis of core financial and
.economic analysis to predict the movement of stocks price
On the other hand, technical analysis is the study of prices and volume, for
.forecasting of future stock price or financial price movements
Simply put, fundamental analysis looks at the actual company and tries to figure
out what the company price is going to be like in the future. On the other hand
technical analysis look at the stocks chart, peoples buying behavior etc. to try
.and figure out what the stock price is going to be like in the future
In this article we will go into the basics of fundamental analysis. Technical
analysis is a little more complicated. It is much more of an "art" than a science.
It depends more on experience and involves some statistics and mathematics, so
.explaining technical analysis is out of the scope of this article

The Basics of Fundamental Analysis

Fundamental Analysis Definition
Fundamental analysis is a stock valuation method that uses financial and
.economic analysis to predict the movement of stock prices
The fundamental information that is analyzed can include a company's financial
reports, and non-financial information such as estimates of the growth of
demand for products sold by the company, industry comparisons, and economy..wide changes, changes in government policies etc
General Strategy
To a fundamentalist, the market price of a stock tends to move towards it's real
value or intrinsic value. If the intrinsic/real value of a stock is above the
current market price, the investor would purchase the stock because he knows
that the stock price would rise and move towards its intrinsic or real value
If the intrinsic value of a stock was below the market price, the investor would
sell the stock because he knows that the stock price is going to fall and come
.closer to its intrinsic value
All this seems simple. Now the next obvious question is how do you find out what
the intrinsic value of a company is? Once you know this, you will be able to
compare this price to the market price of the company and decide whether you
.want to buy it (or sell it if you already own that stock)

To start finding out the intrinsic value, the fundamentalist analyzer makes an
.examination of the current and future overall health of the economy as a whole
After you analyzed the overall economy, you have to analyze firm you are
interested in. You should analyze factors that give the firm a competitive
advantage in its sector such as management experience, history of performance,
growth potential, low cost producer, brand name etc. Find out as much as
.possible about the company and their products
Do they have any core competency or fundamental strength that puts them
?ahead of all the other competing firms
?What advantage do they have over their competing firms
?Do they have a strong market presence and market share
Or do they constantly have to employ a large part of their profits and resources
?in marketing and finding new customers and fighting for market share
After you understand the company & what they do, how they relate to the
market and their customers, you will be in a much better position to decide
.whether the price of the companies stock is going to go up or down
Having understood the basics of fundamental analysis, let us go into some more
.details
When investing in the stocks, we want the price of our stock to rise. Not only do
we want our stock price to rise, we want it to rise FAST! So the challenge is to
?figure out: which stock prices are going to rise fast
Some stocks are cheap and some are costly. Some are worth Rs.500 and some are
even worth 50paise. But the price of the stock is not important. The price of the
stock does not make a stock good to buy. What is important is how much the
.price of the stock is likely to rise
If you invest Rs.500 in one stock of Rs.500 and the price goes up to Rs.540 you
will make Rs.40. However, if you invest Rs.500 in a 50paise stock, you will have
1000 stocks. If the price of the stock goes up from 50paise to Rs.1, then the
.Rs.500 you invested is now Rs.1000. You made a profit of Rs.500
If you understand this, you can see that the price of the stock is not important.
What is important is the rise in the stocks price. More specifically the
.percentage rise in the stock price is important
If the Rs.500 stock becomes worth Rs.540, then that is a 8% rise. This 8% rise
only makes us Rs.40. On the other hand when we invest the same Rs.500 in the
50paise stock and the stock price goes up to Rs.1, it is a 100% rise as the stock
.price has doubled. This 100% rise makes us Rs.500
The point is that when picking a company, we are interested in a company whose
.stock price will rise by a large percentage

Please note: Looking at the above paragraphs, it may seem like a good idea to
buy all the really cheap 50paise and Rs.1 stocks hoping that their price will rise
by 100% or more. This sounds good, but it can also be really really bad some
times! These really small stocks are very volatile and unless you know what you
.are doing, do NOT get into them
However, the point to be noted is that we are interested in stocks that will have
the highest % rise in the stock price. Now the question is, how do you compare
stocks. How do you compare a stock worth Rs.500 to a stock worth 50paise and
.figure out which one will have a higher percentage rise
How do you compare two companies that are in different fields and different
industries? How do you know which one is fundamentally strong and which one
?is week
If you try to compare two companies in different industries and different
customers it is like comparing apples and elephants. There is no way to compare
!them
So fundamental analysts use different tools and ratios to compare all sorts of
!companies no matter what business they are in or what they do
Next let us get into the tools and ratios that tell us about the companies and their
....comparison

!Earnings per share (EPS) ratio & what it means

Even comparing the earnings of one company to another really doesnt make any
sense, if you think about it. Earnings will tell you nothing about how many
shares the company has. Because you do not know how many shares a company
has, you do not know how many parts that companies earnings have to be
divided into. If the company has more shares, the earnings will be divided into
.more parts
For example, companies A and B both earn Rs.100, but company A has 10 shares
.outstanding, so each share holder has in effect earned Rs.10
On the other hand, if company B has 50 shares outstanding and they too have
earned Rs.100 then each shareholder has earned Rs.2. So you see it is important
to know what is the total number of outstanding shares are as well as the
.earnings
Thus it makes more sense to look at earnings per share (EPS), as a comparison
tool. You calculate earnings per share by taking the net earnings and divide by
.the outstanding shares
EPS = Net Earnings / Outstanding Shares
So looking at the EPS ratio, you should go buy Company A with an EPS of 10,
right? EPS is not the only basis of comparing two companies, but it is one of the
.methods used

:Note that there are three types of EPS numbers

Trailing EPS last years numbers and the only actual EPS
Current EPS this years numbers, which are still projections
Forward EPS future numbers, which are obviously projections
EPS doesnt tell you whether its a good stock to buy or what the market thinks
....of it. For that information, we need to look at some other ratios next

?Price to earning (P/E) ratio & what it means

If there is one number that people look at than more any other number, it is the
Price to Earning Ratio (P/E). The P/E is a ratio that investors throw around
with confidence as if it told the complete story. Of course, it doesnt tell the whole
story (if it did, we wouldnt need all the other numbers.)
The P/E looks at the relationship between the stock price and the companys
earnings. The P/E is the most popular stock analysis ratio, although it is not the
.only one you should consider
You calculate the P/E by taking the share price and dividing it by the companys
EPS (Earnings Per Share that we saw above)
P/E = Stock Price / EPS
For example: A company with a share price of Rs.40 and an EPS of 8 would have
a P/E of: (40 / 8) = 5
?What does P/E tell you
.Some investors read a high P/E as an overpriced stock
However, it can also indicate the market has high hopes for this stocks future
.and has bid up the price
Conversely, a low P/E may indicate a vote of no confidence by the market or it
could mean that the market has just overlooked the stock. Many investors made
their fortunes spotting these overlooked but fundamentally strong stocks before
.the rest of the market discovered their true worth
In conclusion, the P/E tells you what the market thinks of a stock. It tells you
whether the market likes or dislikes the stock. If things are vague and unclear to
you, do not worry. The next ratio will make everything you read till now make
..sense

!PEG (Price to future growth ratio!) and what it tells you

The market is usually more concerned about the future than the present, it is
always looking for some way to figure out what is going to happen in the
.companies future

.A ratio that will help you look at future earnings growth is called the PEG ratio
You calculate the PEG by taking the P/E and dividing it by the projected growth
.in earnings
PEG = (P/E) / (projected growth in earnings)
For example, a stock with a P/E of 30 and projected earning growth next year of
.15% would have a PEG of 30 / 15 = 2
?What does the 2 mean
Technically speaking: The lower the PEG number, the less you pay for each unit
of future earnings growth. So even a stock with a high P/E, but high projected
.earning growth may be a good value
.So, to put it very simply, we are interested in stocks with a low PEG value
Just for the sake of understanding, consider this situation, you have a stock with
a low P/E. Since the stock is has a low P/E, you start do wonder why the stock
has a low P/E. Is it that the stock market does not like the stock? Or is it that the
stock market has overlooked a stock that is actually fundamentally very strong
?and of good value
To figure this out, you look at the PEG ratio. Now, if the PEG ratio is big (or
close to the P/E ratio), you can understand that this is probably because the
projected growth earnings are low. This is the kind of stock that the stock
.market thinks is of not much value
On the other hand, if the PEG ratio is small (or very small as compared to the
P/E ratio, then you know that it is a valuable stock) you know that the projected
earnings must be high. You know that this is the kind of fundamentally strong
.stock that the market has overlooked for some reason
Important note: You must understand that the PEG ratio relies on the projected
% earnings. These earnings are not always accurate and so the PEG ratio is not
.always accurate
Having understood these basic three ratios, you probably have started to
understand how these ratios help you understand a stock and what is valuable
.and what is not
In the next section we shall look at some of the things that every investor must
know about. Something that SILENTLY eats into the profits of each and every
...investor and how to beat it

Inflation" & how it eats your money silently & affects your"
!investments
Inflation, is an economic concept. What the cause of inflation is, is not important
to us from the point of view of this article. What is important to us is the effect of
inflation! The effect of inflation is the prices of everything going up over the
.years

A movie ticket was for a few paise in my dads time. Now it is worth Rs.50. My
dads first salary for the month was Rs.400 and over he years it has now become
Rs.75,000. This is what inflation is, the price of everything goes up. Because the
.price goes up, the salaries go up
If you really thing about it, inflation makes the worth of money reduce. What
you could buy in my dads time for Rs.10, now a days you will not be able to buy
for Rs.400 also. The worth of money has reduced! If this is still not clear consider
this, when my father was a kid, he used to get 50paise pocket money. He used to
use this money to go and watch a movie (At that time you could watch a movie
for 50paise!)
Now, just for the sake of understanding assume that my dad decided in his
childhood to save 50paise thinking, that one day when he becomes big, he will go
for a movie. Many years pass. The year now is 2006. My dad goes to the theater
and asks for a ticket. He offers the ticket-booth-guy at the theater 50paise and
asks for a ticket. The ticket booth guy says, I am sorry sir, the ticket is worth
!!Rs.50. You will not be able to even buy a paan with the 50paise
The moral of the story is that, the worth of the 50paise reduced dramatically.
50paise could buy a whole lot when my dad was a kid. Now, 50paise can buy
.nothing. This is inflation. This tells us two important things
Firstly: Do not keep your money stagnant. If you just save money by putting it
your safe it will loose value over time. If you have Rs.1000 in your safe today and
you keep it there for 10years or so, it will be worth a lot less after 10 years. If you
can buy something for Rs.1000 today, you will probably require Rs.1500 to buy it
.10 years from now. So do not keep money locked up in your safe
.Always invest money
If you cant think where to invest your money, then put it in a bank. Let it grow
by gaining interest. But whatever you do, do not just lock your money up in your
safe and keep it stagnant. If you do this, you will be loosing money without even
knowing it. The more money you keep stagnant the more money you will be
.loosing
Secondly: When investing, you have to make sure that the rate of return on your
.investment is higher than the rate of inflation
?What is the rate of inflation
As we said earlier, the prices of everything goes up over time and this
phenomenon is called inflation. The question is: By how much do the prices go
?up? At what rate do the prices do up
The rate at which the prices of everything go up is called the "rate of inflation".
For example, if the price of something is Rs.100 this year and next year the price
becomes approximately Rs.104 then the rate of inflation is 4%. If the price of
something is Rs.80 then after a year with a rate of inflation of 4% the price go up
to (80 x 1.04) = 83.2
So, when you make an investment, make sure that your rate of return on the

investment is higher than the rate of inflation in your country. In our county
India, for the year 2005-2006 the rate of inflation was 4% (Which is really low
and amazing!). This rate keeps changing every year. The finance minister
generally gives the official statement on the inflation rate of the country for a
.particular year
?What is the rate of return
The rate of return is how much you make on an investment. Suppose you invest
Rs.100 in the market and over a year, you make Rs.120, then you rate of return is
.20%
If you invest Rs.100 in the market today and you make money at a 3% "rate of
return" in one year you will have Rs.103. But now, since the rate of inflation is at
4%, an item costing Rs.100 today will cost Rs.104 a year from now. So what you
can buy with todays Rs.100, you will only be able to buy with Rs.104 a year from
.now
But the Rs.100 that you invested has grown only at a 3% rate of return and so it
!is worth Rs.103. In effect, you are loosing money
So in conclusion, the rate of return on your investments, have to be higher than
.the rate of inflation
From the above paragraphs you can note how silently, inflation eats into your
money. You would not even know about it an your money would sit loosing value
for no fault of yours. But inflation is not the only thing you should be
considering, there are other things too that eat into you money. The first thing is
.brokerage and the second thing is taxation

!Investors beware of: Brokerage and taxation

You probably know the concept that all your transactions in the stock market are
done though a "stockbroker". A stockbroker earns a commission on whatever
transaction you make. Suppose you make a transaction of Rs.2000, and the
stockbroker charges you a 3% commission, then you have to pay the stockbroker
Rs.60 (3% of Rs.2000) for the transaction. So your total investment in the
-/transaction in not Rs.2000. The total investment in the transaction is Rs.2060
So after sometime, if the price of the stocks you invested in goes up to Rs.2060
then you have not made any money because the total amount you invested was
-/Rs.2060
What is more, even when you sell the stocks, you have to pay the broker
brokerage of 3%. This means that, when you sell the stocks for Rs.2060, you
have to pay the broker Rs.61.6 so the profit of Rs.60 you made on the transaction
!!is gone, in fact you actually make a loss of Rs.1.6
So in effect even though you made a profit of Rs.60 because your stock price
.went up, you have actually made a loss

If combine this with the fact that inflation reduces the value of money over time,
you are just loosing money if you do not invest wisely without understanding
.brokerage and inflation
Important note about brokerage: Brokers make money on whatever transaction
you make. Whether you buy or sell, brokers will make money. Because brokers
basically make money on transactions. Because of this, brokers tend to
encourage you to trade. They dont really care about whether you make a profit
or loss. They just care about whether you are trading. The more money you are
using for trading, the more they will make. Because of this, it would be wise to
not blindly follow your brokers advise. The broker will give you hot tips etc.
not because they are looking out for you and your profit, but because they are
!thinking about their own personal profit
!!!There is even one more factor that eats into your money. Tax
Please note: We are not in any way encouraging you to not pay tax! We are just
.educating you about it
There is a short term capital gain tax in our country. For a short term (less
than one year) you have to pay tax on any capital gain you make though the
stock market trading. How much % tax you have to pay, depends on which "tax
.bracket" you fall in
Just to give you an idea. If I make Rs.100 though a transaction in the stock
market, since I fall in the 33% tax bracket. It have to pay Rs.33 of that to the
!!government
Please note: The government encourages you to be a long term-investor by
having no long term capital gain tax. If you make a capital gain by investing for
a period greater than one year, the you do not have to pay any tax on the money
.you make
Now combine this short term capital gain tax with brokerage and inflation!
Think about it for some time. You will almost make nothing on a small profit
gains! If you want to make money out of the stock market, you must make large
.profit gains
Conclusion: As a general rule, just for the sake of simplicity, your investments
must grow at a minimum rate of 15% per year to stay ahead of inflation, tax and
.brokerage!! Remember this when making all your investments
This concludes our basics of the stock market guide. There is lot more to learn!
And the best way to do it is to start investing! (Dont invest too much in the
beginning but do start!) Once you have your money in the market, you will start
!to understand things a whole lot better