Define Mutual Fund, Stocks and Shares

'Stocks', also known by the terms 'Shares' or 'Equity', are issued by Companies when they need money (Capital) to build their factories and for buying raw materials, to pay workers, etc. (Working Capital). Holding a company's stocks means that you are one of the many owners (shareholders) of a company.

'Mutual Funds' are a a managed fund where many people put in money into the fund and the managers of the fund buy shares, bond or other financial instruments. When a mutual fund scheme is first started it has a certain capital and this capital value is divided into units. Let us take for example Mutual Fund Co. (MF) which has a capital of $100 Million and this capital is divided into one million units of $100 each. An individual investing $1000 in MF will receive 10 units of MF Company. The MF invests in Stocks of different Companies and Government Bonds. In the course of time these investments will gain in value. In our example let us say the total investments or 'Assets' of MF increased to $120 Million, then the value of each unit becomes $120. This value is known as the 'Nett Asset Value' of the unit. Mutual fund Companies declare their per unit Net Asset Value daily at the end of business hours. Mutual fund are discussed in more details on our dedicated page on Mutual Funds

Initial Public Offering - IPO

When a new Company issues shares to the Public for the first time, it is called an 'Initial Public Offering' (IPO) and such issues are 'prime issues' and therefore are referred to as the 'primary market'. IPOs are normally issued at their 'face value', that is the value of each of their shares, normally $1- in USA and Rs.10- in India. Some times existing Companies can issue IPOs at a premium to their face value, like in the recent example of Coal India, a 100% Government owned Indian Company, issued its IPO at a premium of about Rs.235- on their Rs.10- face value shares.

Stock Exchanges

Companies register themselves into 'Stock Exchanges', like the 'New York Stock Exchange' or 'NYSE' or 'Bombay Stock Exchange' or 'BSE' and the 'National Stock Exchange of India' or 'NSE'.

They do this in order for their shares to be traded - or in other words to be bought and sold in the open market. Such dealings are usually carried out by registered stock brokers of these exchanges. The price of the shares of all the Companies registered in these exchanges are published online instantaneously during trading hours - usually from 9AM to 3.30PM on all working days. Anyone can visit the NYSE, BSE or NSE websites and view these prices online. These price change almost every second according to the supply and demand position.

Stock Market Index

Various Stock Market Indices, published in real time, gives us an indication of the Stock Market health of the various Nations and thus of the world. The most popular Market Indices of the world are the National Indices of Industriliased Countries like the American Standard and Poor's 'S&P 500'; The Dow Jones Industrial Average (Dow Jones Indices)‎ 'DJIA', the NASDAQ (National Association of Securities Dealers Automated Quotations); the Japanese 'Nikkei 225', the Russian 'RTSI', the Indian 'SENSEX' and 'NIFTY' and the British 'FTSE 100', etc. These indices are a numerical value arrived at by using formulas which takes into account the instantaneous stock value of the top companies included in the particular index with consideration or giving weightage to their total market worth.

Why invest in Stocks or Shares?

Investment options for the average individuals are limited to Fixed Deposits in Banks, buying property, buying gold or investing in Shares. Historically it has been proven that shares are the best form of investment to get the best returns on your money. The trick is to invest in shares of good Companies.

By investing in shares of good companies during your working years you are making a good foundation for your fortunes in later years. The trick is to invest in shares of good Companies. This is what the rest of this site is all about. How to pick the right shares. To make our discussions on stocks or shares and Stock exchanges, we will be using the Indian stock exchanges of BSE and NSE as role models here. The Indian stock exchanges are quite advanced and has one of the best online trading systems.

Who can Invest in Stocks / Equity / Shares

In the olden days, stocks of Companies were bought only by the rich, but now, it can be bought by anyone who can open a Bank Account. You can buy shares in small quantities, at any time, whenever you have spare cash. In fact you can buy  Share under Systematic Investment Plans (SIP) of various Mutual Funds. Shares of Companies used to be issued in physical form as Share Certificates, but now it is credited and debited to your Demat Account like money in a Bank Account. The term Demat means 'dematerialized account'. For example in India for an Indian citizen to buy or sell shares, a 'Demat Account' is a must. Anyone who can open a Savings Bank Account in India is eligible to open a Demat Account. In fact most branches of Indian Banks have the facility to open Demat Accounts. This system is universal and in every country you can open 'Demat' or 'Electronic Stock Account' and use it to buy and sell shares online or e-trade in Stocks.

Shares or Property

Many young people yearn to have their own house or flat as soon as they start earning, and take loans to buy a house. The problem with such a decision is that they will be burdened with monthly payments of EMI (equated monthly installments).

If one calculates the monthly interest on the amount with which the house was bought and compare it with the monthly rent for the same house, you will be surprised to know that it will be actually cheaper to rent the house or flat. When you take a loan, the interest you are paying for the loan, is more than the interest rates on Fixed Deposits.

As an example, say the flat costs Rs.25-lakhs (Rupees 2.5 Million) and the Bank fixed deposit (FD) rate per year is 8%, the interest on 25- lakhs FD at 8% works out to Rs.2lakhs per year or Rs. 16,666- per month. So if you take a loan of Rs.25 lakhs, you will be paying for just the interest part on the loan of more than Rs.16,666- per month. You could easily get a better flat or house for rent at Rs.10,000- per month.

Later on if you want to sell the flat or house, you will need to advertise for a buyer, then go through the process of showing the house to many brokers and prospective buyers, bargain with them, and then most probably get the money as Black Money in a suit case. You will then have to hide this money and always be in fear of robbers and the tax authorities.

If instead of going for a loan at the younger age, you start investing in shares, you are building yourself a good Capital base. Later on you can pick and chose the house you want and also have plenty of spending money to spare.

So Invest in shares of good Companies for long term appreciation. You must be able to pick Multibagger Companies that will grow in the future and multiply the value of your shares many times over. How can you find such Multibagger Companies? This is what the rest of this site is all about, we will teach you the tricks to be able to spot these multibagger companies.