Stocks

Stocks are equity investments, which means that when you buy stock in a corporation you become a shareholder and actually own a part of that corporation. Of course, your equity, or ownership, in a corporation which may issue millions of shares is much smaller than the equity you have in the real estate you purchase. What's similar is that you own something that you have the right to sell or hold onto, as you choose.
There are two main reasons to buy stocks:

• You expect the price per share to increase so you can sell your shares in the future and make a profit.
• You expect the stock to generate income in the form of dividends.

The reason that stocks are popular investments despite the fact that they can be volatile, or change value rather quickly within a short time, is because historically stocks in general have provided stronger returns than other securities. As they tend to be rather volatile over short-term periods, generally investors who consider investments into stocks have a long-term investment horizon of 5-years or more.

Determining the stock value

Stocks don't have fixed values. A stock's price is ultimately determined by what investors are willing to pay to buy shares. Among the factors that affect the price of a stock are:

• The company's sales or revenue growth, sometimes called top-line growth
• The company's earnings growth, sometimes called bottom-line growth
• The way the company is managed
• The quality or advantage of the products or services it offers
• The condition of the economy and the financial markets
• The particular industry in which the company operates

Changing prices

Stock prices change according to the basic rules of supply and demand. For example, if a large number of investors buy Stock A, its price will be driven up because there are only a fixed number of shares available in the marketplace. The stock becomes more valuable because there is a high demand for it.

The reverse is also true. If the company that issues Stock A doesn't live up to the expectations that investors have for it, demand for the stock is likely to drop. That can prompt shareholders to sell their shares, increasing their supply and driving prices down.

If you invest in individual stocks, you have to be prepared for that ebb and flow, and should consider having a plan in place for how long you'll hold your shares if they lose value. One approach some investors use is sell a stock when it has lost 15% or 20% of the price at which they purchased it. Similarly, these same investors might sell a stock when it has increased 15% or 20% in value, and put the principal plus profit into another investment.

The impact of size

You can subdivide stocks into many different categories as you attempt to assess the potential return they'll provide and the potential risk they pose to you and your investment portfolio.

One of the most widely used categories is market capitalization, or company size, sometimes shortened to market cap. You calculate market cap by multiplying the current price per share times the number of shares a company has outstanding. In a simple example, a company that has 10 lakh shares in the marketplace that sell for Rs 20 a share has a market cap of Rs 2 crore.

What's the cap?

Large caps are the biggest companies. They usually have more financial assets that can help them survive a market downturn. Mid caps are medium sized companies. They very often may have more potential for growth than large caps. Small caps may increase more quickly in price, they may also expose you to a greater risk of loss because they often have fewer financial resources to see them through a market downturn.