Tuesday, August 30, 2011

Online Stock Investing FAQ’s

The recent down trend in global financial market has scared the investors like hell and they have stopped the very process of online stock investing. Instead of doing online stock investing of their hard earned money they find it safe to keep it locked in their savings account. We cannot blame them, may be they had enough of it when the stock market crashed in 2008.

All investors are confused and has taken a back seat, old time investors are confused and are rethinking their old stock investing styles. The new investors are also apprehensive to start online stock investing as they are not sure that whatever they have learned are all questionable?

So here is our Investment Blogger with his helpful tips to all those scared investors who are hesitating to start their process of investment. These question online stock investing question are the top 10 topics that needs rehearsal once more. The objective is to clear the thoughts of fellow investors on these very basic investment tips.

Q1. Whether it is good to do online stock investing at all?
This looks to be the most obvious question in the minds of all investors after seeing the worst ever market fall in recent few decades. So let me calm the nerves of these investors and make a statement that online stock investing is still the best investment option available with the investors of this world. But one should never mistake stocks as short term investment option. People who invest in stocks with short term goals are the biggest sufferers in present financial crisis. When we say long term we mean that the investment horizon shall be more than five years.

Q2. How to select the best stocks for my investment portfolio?

The easiest way to do online stock investing in it is to scrutinize the stock’s price earning ratio (P/E) ratio of that stock. To calculate price earning ratio (P/E) pick up the profit after tax (PAT) made by the company form its financial statement. After knowing PAT calculate Earning per share (EPS=E) by dividing PAT by no of share outstanding in the market. This figure is also available in the financial statements of companies. Divide current market price of stock (P) by EPS (E) will give you the value of price earning ration (P/E).

Assume that a stock is traded in market wit market price (P) of $10 and its earning per share (E) is $1 then its price earning ration is $10/$1 = 10. The easiest way to make judgment on P/E value of a stock is to compare its P/E ratio with P/E ratio of companies of same sector. If a particular stock is traded at a very high level of P/E ratio it means that investors of this stock are very bullish on the expected future earnings of this stock.

A value investor always go for buying stocks of a fundamentally strong company which has not been noted or is rather disliked by majority of other investors. In such a situation the stocks are traded at very low levels of P/E ratio. Certain qualified investors not only calculate the P/E ratio of a stock but also use this value to compare it with the expected growth rate (in PAT). In general a stock is considered as worth buying if P/E is either same or below its growth rate.

Q3. Are dividend paying companies better to invest in?

All investors love getting paid for investing in the form of dividends. Dividends payment is a form of profit sharing by companies among shareholders. Actually companies do forecast big profits and cash flows for future to lure its investors, but these are only words. Dividend payment is real money which speaks louder than words. It is always good to invest in companies which pay reasonable dividend yield in the rage of 2% to 5%. Companies which are paying a very high dividend yields (say 10%) must be looked at with suspicion. Dividend yield goes up whenever there is a fall in market price of stock and falling stock prices is not a good sign.

Q4. It is good to invest in equity by investing directly in stocks or through mutual funds?

Stocks are riskier investment than mutual fund. But if you will ask Warren Buffett the same question he will say that mutual fund investment is best for non trained investors where they get an average returns. For qualified investors stocks are the best options.

What qualified investors does different than non-qualified/ untrained investors is that (a) They always consider stock investment as long term investment option, (b) They always buy stocks which are undervalued and of fundamentally strong companies, (c) They are not habitual investors, they wait for the stock market to fall and then load their money in it. All the above three parameters (a,b&c) discussed are not generally followed by normal investors.

This is the reason why non-trained investors are asked to invest in equity through mutual fund route. Fund Managers of Mutual Funds are trained and are experts in the field of financial investment. These fund managers actually know how to apply to the above discussed three steps (a,b&c) but their service comes at a price. These days there is also an option of investing in index funds which blindly follows the movements of stock index. In index funds the charges payable to mutual fund companies are considerably lower than normal equity funds.

Q5. What’s the difference between ETF and normal mutual funds?

ETF is same as normal mutual fund which consists of a variety of stocks in its portfolio. Mutual fund collects funds form you and me and buy stocks creating a portfolio. The selection of stocks is a skill and a trained fund manager of mutual fund uses his skill and knowledge to select stocks. But in ETF, such skilful fund manager is not required because the composition of ETF portfolio exactly replicates the stocks that make an index. The number of stocks in ETF portfolio is in the same proportion as that of the index stocks.

Q6. Why Systematic Investment Plan (SIP) is such a popular form of investing?

Above we have seen that it is best to buy undervalued stocks, but it even tougher to predict when stock prices will fall. The price of stocks is continuously moving up and down. Following a SIP plan allows investors to buy mutual fund units each month. When price is low they buy more units and when price are high they but less number of units.

This is called dollar price averaging and by using the SIP method of investing investors need not worry to time the market. There is a other way, and this is very well followed by Warren Buffett, he can wait for years and years for market to fall and only then he buys stocks. This is a tough way but it needs a lot of patience.
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