Why is it most of us can’t figure out whether Sensex is the index of share prices on the Bombay Stock Exchange or it is about the private life of Sushmitha Sen, even while a few are making bales and bales of money by playing in the stock markets? The answer is simple: Stock market is a cramped place, and only a handful can actually play there.
But seriously, wouldn’t you want to be part of what is being called the stock market boom? Don’t you dream of counting crisp wads of rupee notes that have accrued to your bank account? If ‘yes’ read on. If ‘no’, please wake up.
The moment you decide to take a jump into the stock market, the most elementary thing to do is to ensure that you land safely. This is the advice a fireman would give you. But as you would realise I don’t work for the fire department, so I would merely tell you to understand the various investment options that are possible on a bourse? Immediately this begs the question: What is a bourse? Well, it is a simple word that journalists use, almost in a reflex action, whenever they feel compelled to use a synonym for stock market. Other than that, most writers don’t have a clue as to what a bourse actually means. For all we care it could be a place where the Parisians made love. So we will let that pass.
As we are on the subject of investment options, you have to make up your mind on whether you want to park your money in shares or spread yourself on bonds and debentures. Most experts, primarily me actually, would advise you to stay away from debentures for the simple reason nobody has really understood what they stand for. The official definition of a debenture, I am not making this up, is: ‘The ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future. Like other types of bonds, debentures are documented in an indenture.’ Unable to crack this, most stock markets have stopped trading in debentures.
That leaves us with having to contend with shares and mutual funds alone. Firstly, we will take up mutual funds. This is a very popular instrument of investment that has helped many portfolio managers to come up in life very fast. This works on the sterling principle that when you give some money to the banker or portfolio manager to be put on stocks, he does so fully at your own risk while he gets to pocket the commission and the profits (if any). In the process, he also gets to figure out the difficult dynamics of the stock market with your money. This is an invaluable lesson that will stand him in good stead when he launches his own mutual fund. That is why they keep announcing in the advertisements that mutual funds are risk-free. ‘For whom’ is the question you need to ask.
When you plan to put your money on shares straight away, the basic thing to do is to evaluate the company you have set your eyes on. How does one understand the intrinsic value of a company? Some misguided mentors will tell you to take into account the P/E multiple of the company. Actually, ‘P/E stands for Price/Earning multiple, Here the price is the current market price of the share and the Earning is the EPS of the company. A P/E multiple of the stock shows the times that the market is willing to pay for the present earnings of the company.’ If you can decipher the meaning hidden somewhere in the above dense lines, then you would be actually heading the Bombay Stock Exchange. So the P/E ratio actually doesn’t work with common people like you and me.
So, to judge a company you must know how to read its annual report and balance sheet. I know you are already asking the question: How does one read a company’s annual report? From front to back, if written in English, and back to front if in Urudu. This is the fundamental principle behind cracking the corporate reports. With balance sheets, there is no confusion over English or Urudu as you deal mostly with numbers. But with numbers you have to be careful, and in general stay away from companies wherein the entry for the directors’ salaries are marked in line with the ‘losses’ column.
This is all to the basic stock market fundas. Now all you have to do is to rustle up several bags of rupees and go to the nearest stock market (you can identify them from the name board outside) and begin investing.
When you end with a lakh, do feel free to call me. But don’t tell me that you started with a crore!
