5 thingss you must know before buying shares

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Over the last year or so, the stock market has beenhogging the limelight. Companies have been coming outwith Intial Public Offerings (which is when thecompany first makes its shares available to the publicby getting them listed on the stock exchange).Everyone wants to join the party and make money.

1). You own a part of the business When you invest in stocks, you do not invest in themarket (despite what you think). You invest in theequity shares of a company. That makes you ashareholder; you now own a small part of that businesswithout having to go to work there. The good news is, since you own part of the company,you are entitled to a share in its profits. The bad news is that you are also expected to bear thelosses, if any. That is why investing in shares is risky. If thecompany does well, you benefit. If it does not, youlose. There are no guarantees whatsoever.

2). In the short-run, the price of the share canwildly fluctuateLet's say the company fixes the price of each share atRs 10. This is called the face value of the share. When the share is traded in the stock market, thisvalue may go up or down depending on supply of anddemand for the stock. If everyone wants to buy the shares, the price will goup. If nobody wants to buy the shares, and many wantto sell them, the price will fall. The value of a share in the market at any point oftime is called the 'price of the share' or the 'marketvalue of a stock'. A share with a face value of Rs 10 may be quoted at Rs55 (higher than the face value) or even Rs 9 (lowerthan the face value).So you might have paid Rs 15 for a share which is nowquoting at Rs 12. Don't panic and sell. If it is agood company, the share price will eventually rise. The prices will get influenced by the market sentimentand the general direction of the market. As a result,you may see short-term slumps.

3). Always invest for the long-termThe best way to make money is to buy low and sellhigh. This means you should buy the share when theprice is low and sell it when it is high. That is why you must buy in a bear market. This is aterm used to describe the sentiment of the stockmarket when it is low and the prices of shares havegenerally fallen. The best time to sell is in a bullmarket, when the sentiment is high and the prices ofshares are rising. But it is very difficult to time the market. In fact,no one can do it. If we could, we would all bemillionaires, wouldn't we?That is why, when you invest in the market, it is bestto invest for the long-term. Hold on to your sharesfor a few years before you think of selling them. Companies increase their sales and book higher profitsover the years. This will eventually reflect in theshare price, so ignore the short-term slumps. Once you decide that you are in for the long haul, youcan ride over the bear and bull runs with no stress atall. Over time, the price of your shares willappreciate. If you are getting a good price for your stock, keepselling small amounts at regular intervals. Keepbooking profits.

4). Decide how much you want to invest Always remember one basic rule in finance -- ifsomething gives you higher returns, that's usuallybecause it carries a greater risk. That's the reason why not-so-good companies will payyou a higher rate of interest for your deposits. The same reasoning goes for stocks too -- they givehigher returns than, say, bank fixed deposits becausethey are more risky. So the amount of money you investin the market depends on your capacity to bear therisk. If you are young with a steady job, you can invest alarger proportion of your income in the stock marketthan, say your parents who are close to retirement. Ifyou have a lot of debt to repay, avoid putting toomuch of your money in stocks. It's best to decide how much of your savings you willallocate to stocks, and stick to that plan. Don't getswayed by how much your friend is investing.

5). Don't rely solely on 'good adviceA smart investor should never invest buy shares ofcompanies he doesn't know much about. Relying on'advice' from friends is not always a great idea. Dosome groundwork yourself.It doesn't matter who is buying the stock or who isrecommending it. Steer clear of such ways of making afast buck. These tips will land you in a soup. When you hear of a 'hot tip', dig further. Take a look at the company's profit and lossstatement, which would have been audited by charteredaccountants. There is a wealth of information here. Tounderstand the information in a Profit & Loss Account.Do some basic calculations on your own. The EarningsPer Share (net profit/ number of shares) andPrice/Earnings ratio (market price/ EPS) should giveyou a fair understanding.