Stocks basics

I really didn’t want to call it ‘Stocks 101’. It makes it sound boring. Anyway so what I am trying to do here is to give a general view of the way the things occur in equity markets. Some terminologies used. I have been trading for a very short time now and would like to share some knowledge that I have gathered during all this time.

Stocks are one of the best tools available to build wealth. Stocks or Common stocks are like contracts that gives the buyer ownership to a part of the institution. It means, if I own a Halal cart and divide its price into 100 equal parts and sell 10 of those to my friend liberalcynic then he would own 10% of my Halal cart business and I bet he would love it. Now simply extrapolate this to a company as big as Apple Inc. and you have a $500 per share to own a piece. And that one piece is one out of 908.44M pieces. This is called outstanding shares which comprises of all the shares owned by company and company insiders such as Timothy D. Cook. Now you multiply this number of share by the current price say $500, you get the current value of company in share market aka market capitalization as $455B.

Lets continue with the example of this well known company to learn some other terms and concepts about stocks commonly used in the market. Everyone knows Apple sales iPhones, iPods, iMacs, and if I may, all the other i’gadgets. All the profits from these sales go in a pot that apple has been holding on for so long that company’s cash reserves has ballooned to some $120B today. This pot is called cash on hand. Now that’s surprising because if I made some profit on our halal cart, liberalcynic won’t let me hold on to that money without taking his share of profits. So it is historically an unusual albeit currently common practice for companies to hold all that cash and not give it back to share holders. An aggressive growth stock that AAPL has been for more than a decade, can afford to not pay share holders back unlike a growth and income stock such as MSFT (Microsoft Corp.). Recently Apple started paying a dividend to share holders to the amount of $12 per year divided and paid quarterly. Now another way to pay back investors is to buy shares back. If a company buys its own shares using this pot of money it has, it helps the price of share rise and the investors see there portfolios swell. I own an iphone and macbook pro so I have an emotional soft-corner for Apple but your emotions have no place in stock market or at least one shouldn’t heed to emotions. A lesson I learned the hard way. So how can one know if a company is good to invest or not. There are various parameters to valuate a company. I will explain a very easy yet not sufficient metric of stock valuation. Say apple earned some $50B in a particular year–they have never– by the sale of goods, services and licenses. There price to earnings ratio as denoted as P/E will be 10 for that year considering the price being $500. If Apple is good –actually great– at this price and earnings, then if the earnings for Apple go to $55B next year and the price stays at $500 then Apple will be even greater of an investment opportunity. Now stocks belong to different industries such as Technology, Pharmaceuticals, Food industry and Biotechnology, etc. There is always a P/E ratio for the industry that you can compare with the ratio for an individual company. If the ratio is lower than industry and other metrics look good then the company is in better position for investement.

I hope this was easy enough to follow and may encourage you to invest. Investing is only way one can fight inflation –a big deal for people like me from countries like India– and grow your capital. Finally lets wrap this a fitting movie quote-

                                                                   “Money Never Sleeps.”