Make Money In Stocks

Getting into a dilemma while investing is a common phenomenon. It usually happens when investors are indecisive about two seemingly similar situations or investment avenues. If the dilemmas are not tackled early on, it could lead to a flawed investment decision, which can be disastrous for your finances. These dilemmas are usually a result of the lack of knowledge among investors about various investment options. This leads to confusion about which investment option is most suitable in a given situation. In a bid to simplify things, investors look for answers that may have worked for their friend or colleague in the past. However, since the situation varies across investors, there is no clear-cut answer or standard solution that will hold good for all investors. In this article we bring out 5 common investment dilemmas that investors grapple with regularly while investing.

1. Stocks vs Equity funds This is undoubtedly the most common investment dilemma faced by several investors, regardless of their investment expertise. This dilemma is rooted in the investor’s belief that investing in stocks and equity funds is one and the same thing. In reality they are quite different and suit investors with distinct profiles, although for a category of investors both options may prove viable. While investing in stocks, investors are required to do their homework (read research) pre-investment and post-investment. This involves understanding not just the company, but also the underlying sector. This is in addition to grasping the macroeconomic implications and its impact on the company under review. Having conducted the research pre-investment, the investor must continue doing so post-investment to ensure he is invested with the right company. With mutual funds it’s a little less complicated. You still have to do the basic research to select the right equity fund. But having done that, the rest of the research (that the investor in stocks has to do on an ongoing basis) is done by a team of experts (read fund managers).

2. Hold vs Redeem This is the dilemma that a lot of investors grapple with. In fact, it won’t be wrong to term it as one of the most difficult investment decisions. Of course, in many cases, the investors are cornered in this situation because they are uncertain of their investment objectives. If there is clarity on that front, then the decision to redeem/stay invested is a relatively easy one. Investments are usually made to achieve a specific investment objective. Hence, ideally investments should be held until the set objective is reached. However, there could be situations where investors are left with no choice but to redeem their investments mid way. Usually, such situations arise if a particular investment fails to perform according to expectations making the redemption an obvious option.

3. ELSS vs ULIPs Although this dilemma sounds surprising, yet it’s true. Many investors find it difficult to choose between ELSS (equity linked savings scheme) and ULIPs (unit linked insurance plans). It is obvious that they fail to appreciate that while both are tax-saving avenues, they are two very different investment options and cater to different investor needs and objectives. The best way to resolve this dilemma is by understanding their respective features and the objectives that they fulfill.

4. FDs vs Liquid Funds Investors who wish to invest their monies for a short-term (say 40-45 days) have (broadly) two options at their disposal – Fixed Deposits (FDs) and Liquid Funds. Most investors are unable to discern which is the superior option. In terms of returns, both options are comparable. However, in terms of tax benefits, liquid funds are preferable for investors in the higher tax brackets, while FDs are favourable for investors in the lower tax bracket (as also for those who don’t have taxable income).

5. Self-investing vs Financial Planner Whether to opt for the services of a financial advisor or not is another dilemma faced by investors. This dilemma has been heightened after SEBI (Securities and Exchange Board of India) has allowed investors to invest directly in mutual funds without paying entry load. Per se, investing on your own or through a financial planner is not a dilemma. It’s a decision that can be made easily based on whether you have the ability and time to define your investment objectives clearly with a financial plan on how to achieve them. Then you need access to research, which is necessary to help you select the right investment option in the right allocation. If you feel upto the task of making these decisions on your own and tracking them post-investment, then you can invest on your own. Else it is advisable to employ the services of a professional.

Everyone talks about stocks and everyone thinks that people in the stocks business are always getting rich, that they are stealing from other people and that stocks are just something really mean. But what are stocks really? I will try to answer this question in this article.

Stocks are pieces of paper. But not just regular ones. Every piece of paper is actually a part of the company. For example a company that has one hotel has 1 million euros worth of capital, because this is how much one hotel costs. Now there aren’t many people in this world that would be able to afford to give one million euros to be the owner of this kind of a company. That is why we invented stocks. Let’s say we split this 1 mil company into 1.000 parts. That would mean that this company can have 1.000 owners, each one owning 1.000 euros worth of the hotel. This is more or less the explanation of the stocks. Stocks are these parts of the company.

Each stock would be worth 1.000 euros in our case and there could potentially be 1.000 owners of this company. Of course usually people own more than on share and there are way less stockholders than there are stocks. But you understand the idea now.

If this is all there is about stocks, how come some people are making lots of money out of it?

There are two ways to earn money from stocks. First one are dividends and second one are capital gains. You can read more about these two in other articles on MakeMoneyInStocks.net because here we’ll just give a very short description of both.

Dividends

Dividends are nothing else but profits. If our hotel made 10.000 EUR of profit last year, this could be payed out to the owners. So if we split 10.000 EUR of profits between 1.000 stocks, then each stock would make 10 EUR. That’s not a lot since people are usually looking for 5-25 % return in stocks, but that’s not the only way to get money out of stocks.

Capital gains

Capitals gains are usually the ones that help people make these huge profits. What are capital gains? Well stocks aren’t always worth their nominal value. In our case, stocks have a nominal value of 1.000 euros, but they will usually be sold at a higher price. Why? Well because this hotel has a good brand, it makes profit and people are willing to pay for that profit. But stocks can also be worth less than a nominal value, if hotel has a “bad name” and investors don’t think it will make any profits. This speculations about profits are always changing and as they change, so does the price. Now if you can anticipate these changes you can make lots of money. Let’s give an example.

Today people think our hotel will not earn any money. That’s why the stock is worth only 500 EUR. But you believe that the company will make lots of profit next year and you buy 10 stocks. Next year, this actually happens. Hotel starts making profit and price of these stocks goes to 1.500 EUR. You now sell them at this price, because you think the hotel will stop making profit next year. You just sold 10 stocks with a total profit of 10.000 euros. This is how the capital gains work.

I hope you now understand better what are stocks and how you can make money out of them.