Short Selling : Explained

When you buy stocks its called ' long ' and when you sell stocks which you have not bought is called ' Short Selling '. Now the question that comes to your mind is how can someone sell shares which they have never bought. Actually when you short sell stocks then you borrow them from your broker. Now what you borrow must be returned too. So you have to buy same number of stocks after some time - it is called ' covering the short '. A trader short selling in futures has to buy back on or before the expiry date of the futures. If a trader has short positions in cash then he has to buy on the same day. Here stocks are sold at a higher price and bought at a lower price. So if you are buying at low price and selling at high price then it means profit. In this case its just doing the opposite i.e. selling first and then buying later.                                

 Why the word Short Selling ?
 Let's break up these words. Here word ' short ' means that trader is short of the shares that he is trading. Second word ' selling ' means selling the stocks which he is short of.                               
Here also the trader uses market fluctuations to his advantage. However, it is more risky than going ' long '. Let's find out the reason for this with the help of an example.
A person buys 1000 shares of a company called SSS at the price of 50 rupees per share. He wants to do ' Day Trading ' and expects that the price would come to more than 50 rupees per share. But near to the closing minutes of market the price reaches 47 and he does not expect the price to come to even 50 in remaining few minutes. He is under a loss of 3000 rupees so he decides not to book the losses and hold those 1000 stocks. He has money in his account and holds these 1000 stocks. The next day the price of the stock comes to 51 and he sells at a profit of 1000 rupees ( note that profit is not exactly 1000 rupees as some money is charged from broker in the form of commission fees ). 
Now on some other day same person Short sells 1000 shares of same company called SSS at the price of 50 rupees per share. He expects that the price would come to less than 50 rupees per share in that day. But near to the closing minutes of market the price reaches 53 and he does not expect the price to come down to even 50 in remaining few minutes. He is under a loss of 3000 rupees but does not want to hold decides to book the losses. This is because in case he wishes to hold the shares then he has to pay interest charged on the stocks because he has borrowed it. So holding short position for a long time can be very costly. However, in F & O there is a provision to hold stocks without any interest charged. But this can be done only till the expiry date of F& O.                              
There are other reasons too that makes Short Selling riskier :                                                                

 1. If the company declares dividend, bonus or right issue during the period you hold the stocks, then it has to be paid by you to the lender because in reality he owns those shares.

2. At the most price of a stock call fall by 100% and that too when the company looses its business and its stock loses all its value. But there is no upper limit for the stocks. So your losses can have no limits.

3. When stock prices go up a remarkable development takes place which is called ' short squeeze '. What actually happens in this is that when stock prices start rising upwards more and more sellers rush to cover the shorts ( it means to buy the stocks which were short earlier ) . This ' short squeeze ' causes huge demand for the stock as both buyers as well as sellers rush to buy the stock. When the demand for the stock rises its price also rises. So the person having short positions bears heavy losses.

4. Generally the stock prices rise. So shorting means going against the general trend.  
Short selling can give you a lot of profit especially in a bear market. But we know that no one can predict the markets. So considering the risks associated with it one must take extra precaution and must be absolutely confident before going for it. 

Good And Bad Aspects Of Online Trading

GOOD                      
        
1. Buying and selling is easier because you don't have to call anyone or go to your broker's office for trading. Just sit at your home, log on to the website and trade with the click of a button.
2. You can place limit orders. If you do not have time to monitor markets then you can place a buy and sell order of any no. of shares at your desired price. Once the stock price reaches your desired price then automatically shares will be bought for you. Later on if the stock price reaches your desired price again the shares will be sold automatically. When you check your account after an hour you will see the profits or loss.
3. Dividends are directly deposited in your trading account.  
4. All transaction statements ( present and past ) can be seen with the click of a button.  
5. Various trading softwares / tools are available which help in taking better decisions.      

BAD    
                                                    
1. Everything depends on one click. If you click at the wrong place then result may be completely opposite.
2. Internet security is a great concern. Your computer could be hacked. If somehow your login id and password reaches wrong hands then consequences can be fatal.
3. Due to technical reason you may have to bear losses without any mistake of yours. However, chances of such technical faults are rare. 
4. Slow computer speed may cause trouble in buying stocks at desired prices.
5. Stock market is very volatile. The stock prices change every second. Due to this placing an order can sometimes be very difficult. You may place an order at a price and later on cancel it after watching a different price.

Types Of Trading In Stock Market

There are three ways of trading in the stock market. These are Day Trading, Position Trading & Swing Trading. Anyone can trade in any of these ways to earn money but he must keep himself updated about the markets and the company in which he is invested. Now let's quickly understand basics of these three types of trading.

Day Trading or ' Intraday ' - In simple words it means buying and selling shares on the same day. In this type of trading main thing is to use the daily price fluctuations to your advantage. A trader generally buys shares when he anticipates the price to go up. He waits for some hours or even minutes and sells it when price rises. After the introduction of internet it has become more popular with traders. A trader can also sell stocks when prices are up and buy later when the stocks are down - ' Short Selling '. A day trader continously monitors market during trading hours and can trade any number of times in a day. In ' Day Trading ' commission fees is least & a trader can trade upto 4 times the money he has in his account. This kind of trading involves more risk but its more exciting and can turn out to be a fast earning option also. But research shows that day traders lose more money than people who buy stocks and hold for long terms. So for beginners its recommended to trade very few shares ( like 5 share of rs 50 each ) before getting hang of it and then go for large numbers. However, people who get easily exited about things in life must completely avoid it.  

Position trading - In this the trader buys stocks and holds it for some months. The trader buys stocks after proper research. He may not monitor the stock market closely during trading hours but keeps himself informed about the economic changes which could affect the market and also about the company in which he has invested. Stocks are bought taking into consideration a longer view of the company and the market. The risk involved is less than Day Trading because the trader does not have to sell stocks in a day.  

Swing Trading - In this stocks are monitored for weeks or months before trading. Although a swing trader may not spend hours monitoring the markets closely but he gives more time monitoring fundamental and technical analysis of the company. He carefully studies financial reports and profiles of the company. Most of the Swing traders study only about few certain sectors and as a result they become experts in those sectors. They are able to predict movement of stocks within their chosen sectors more accurately. This way trading becomes less risky and the trader does not have to give his full time to monitor the market. It suits people who are willing to give time to study markets and have patience to wait for good returns.

What Is The Difference Between Stocks And Futures ?

If you are new to the stock market then you must have heard words ' stocks and futures ' and wondered what is futures. One main thing to understand is that trading in futures involves a lot of risk is not same as trading in stocks.
Here is the comparison between the two :

           Still confused ? Don't worry. Now let us understand futures contract with the help of an example : Consider that this is the month of February. You have been told by your friend to trade in futures for better profits. The reason is because you will have to pay less for number of stock futures purchased and only you will have to pay ' margin money ' plus lower commission fees. This means that you can buy more shares for a lesser price. So you decide to buy futures of a stock called SSS for the month of march. You call your stock broker and ask about details of stock futures of SSS. You are told by your broker that one ' lot ' of SSS contains 75 shares and ' margin money ' per ' lot ' is 20000 rupees. You have 50000 rupees in your trading account and current market  price of SSS stock futures for the month of march is 1000 rupees. So you decide to buy two lots of SSS futures which means 150 shares. Once you buy the two ' lots ' 40000 rupees ( 20000 per lot ) goes from your account in the form of ' margin money ' plus the brokerage. Now you have less than 10000 rupees left in your account. Suppose the price of share of SSS increases by 100 rupees then you will have option of taking profit of 15000 rupees ( 150 * 100 ) by selling those two lots. Now if you sell the futures and take the profits ( 15000 rupees ) then it means that you have made remarkable profit of  30 % within a month. However, you must have noticed that the stock price had risen only 10 % which normally happens in the stock market. Now let us take the same case but instead of stock price rising by 100 rupees we consider that it has fallen by 100 rupees. As soon as the stock price falls by 100 rupees you can get a call from your stock broker. He may ask for deposition of more money as your loss has reached to 15000 rupees and that means after deducting 10000 rupees from your account you still have to pay 5000 rupees  more to pay for the loss. this kind of call is called ' margin call '. If you don't have money to deposit then either you will have to sell the futures lots at a huge loss or even the broker can ( read will ) sell your futures lots. So in this case you will have to bear a huge loss of 30 % in a month. Also it is important to note that when stock prices fluctuate a lot then ' margin money ' is increased. So if in this case you had 60000 ( instead of 50000 ) in your account but ' margin money ' per ' lot ' had increased to 25000 rupees after few days of purchasing then also you would have landed in a similar position. So it better to understand the risks associated with trading in futures before going for it.  

22 Basic Rules Of Investment In Stock Market

There are many basic rules of investment in stock market. Here is a list of most important ones which I have learned over the years through my experience.                            
1. Would you gamble in a casino without knowing rules of the game? Of course not. Same way never invest without having a basic understanding of the stock market. Stock market never forgives and has no emotions.
2. No one can time the market. Not even the best of analysts whom you may have seen on TV ,magazine or a newspaper. If they could do so they would be rich like anything and wouldn't be trying to earn by giving tips to others.
3. Overconfidence is harmful in all aspects of life. This is true in stock market too. Do not increase your investment if you have had success just once or twice.
4. Do not trade with emotions. Emotional traders lose more than what they earn.
5. Keep in mind that you cannot always be right. But remember that stock market is always right. If you short in bull market or you go long in a bear market then you are most likely to lose money. Easy method is to always follow the market.
6. Do not invest all your money in a single stock, no matter how positive the news is. Diversify your investments. This will reduce risk of heavy losses.
7. NEVER ever take a loan and invest your money in the stock market. An experienced person will never advise you of that.
8. Do not blindly trust any analyst or a trading software. People claim to have best of knowledge about a stock and they advice others to invest in a stock. But actually their earnings are not from investing in that stock but by selling you these advices. These advices can be seen in a magazine, television, stock brokers, research analysts etc. It is always better to do your own proper research. It would not take more than 7 hours in a week to find a good stock to invest.
9. Start booking profits partially when the markets are high. Do not wait for a correction. Partial profit booking means you will keep increasing your cash reserve with the rise in markets. So with lot of cash in hand, when market falls you will have a good amount to invest at low prices.
10. Cut of your losses. Also you must avoid increasing your losses by investing more and more in a falling market. It may come as surprise to most of you but most of the investors hold on to a stock when it's price is falling day after another and later on sell it at huge loss.
11. Buy at low price and sell at higher price. Most of the investors track a stock for few days and buy after its price has already risen a lot ( Overbought ). Later on they either sell at a loss are get stuck in a stock for a long time.
12. Huge sums of money have not been made by trading daily but by investing for a long term. Look for long term trends of the market and a company. Returns of 20-50 times or even more can be earned if you invest in a multibagger stock for a long term. 
Read: How To Identify A Multibagger Stock ? 
13. When markets are rising everyone seems to be bullish and when markets fall all become bearish. Best of traders are the one who don't follow others but instead look for signs of trend reversal. Imagine how much money you would have made if you would have predicted SENSEX to rise from 8000 levels in 2009.
14. Do not chase a stock. Keep cash ready and wait for the right price or invest in some other stocks. Your wait might be a long one but remember " everything comes to him who waits ".
15. Do not invest in Futures & Options without having good understanding of it or else it might be your last trade.
Read - What Is The Difference Between Stocks And Futures ? 
16. Over-indulgence must be avoided. There are too many experts in the market ( television, magazine, analysts, brokers etc. ), it is advisable to think before you act. Do not keep changing your portfolio on the basis of these recommendations. Again I would recommend you to carry out your own research before taking any action.
17. Remember that two forces that drive the market are fear and greed. When market was at 21K levels everyone seemed to be bullish. Reports were that SENSEX would soon touch 25K levels. People who could not control their greed bought more and more anticipating huge profits. Later on when SENSEX fell to 17K levels in two days, these people found themselves under huge loss. Same way when SENSEX was below 8K levels there was so much fear in the market that people did not consider it as good investment opportunity. Most of them wanted to wait for the SENSEX to fall to 6.5K levels. Unfortunately they never saw those figures and missed a golden opportunity of investing.
18. Most often stock market moves before the news is out. By the time everyone comes to know about the news, the stock price may already have moved. So if you wait to invest till the news is out you may miss the train.
19. Just like in any other field a good trader must have two qualities- commitment and discipline. People who trade in the stock market just on the basis of their luck are mostly losers.
20. Don't go for penny stocks. Certain unheard stocks rise by 20-50 % in just 2-3 days. This makes many traders to jump into that stock. However, most of the times the prices of these stocks jump on the basis of rumors and later fall more than by 20-50 %. In every bull run certain penny stocks outperforms the SENSEX or NIFTY and they are considered a hot pick by most of the traders. But when market falls these stocks are worst hit. These are the kind of stocks that can ruin all your investments.    
Read: 10 Mistakes That Causes You To Lose Money In Stock Market
21. Be very cautious when you notice that only one trend is visible. Stock market is not uni-directional. If it is going in only one direction then there are lot of chances of a sudden trend reversal. 
22. Avoid opening an account in a small local broking firm. In Jan. 2008 market fell from 21 K levels to 17 K levels just in two days. At that time buying stocks was not possible in nearly all small broking houses. This happened because people who were trading in F & O had to bear heavy losses so there was lot of margin pressure on these broking houses/ private brokers. Due to this, the stock exchange only allowed these brokers to square off the position of the current traders. Many traders had money to buy stocks but could not do so because of this problem. People who had accounts in a well established broking houses e.g. HDFC did not face this problem. Apart from this there are also many other advantages of choosing a well established broking house.

How To Identify A Multibagger Stock ?

Multibagger stocks are desired by everyone. One multibagger stock alone can earn you more money than what you may earn in years. Here are some useful guidelines to find out a multibagger stock :    

1. Check out a company which has a very good business. Also the company's business must be in a sector which has a good growth story behind it. 

2. Find out order value of the company. A company with good order value shows the business solidarity of the company.

3. Look for a midcap stock which has capability to become a largecap. History tells that many a midcap have become large caps and in the process have turned out to be a multibagger. A potential mid caps stock rises more quickly than bluechip companies. Its better to opt for a company with market capital of less than 1000 crores. 
4. Find out if the company has any expansion plans. A company must have expansion plans like increasing its turnover or diversifying its business into other sectors.

5. EPS of a multibagger stock should have increased over past few years. Find it out from its previous data.


6. Look for a company which has a new innovative idea which might have great future potential. This can be like introduction of new technology in field of education, automobiles, treatment of diseases, generation of power, agriculture, reducing global warming etc. 

7. A multibagger company usually pays regular dividends. This shows that it is ready to share profits. But if a company is paying too much dividend then you should be cautious. A company with expansion plans will not pay too much dividend and leave nothing for itself.

8. Don't ask somebody else to do the research for you. Research yourself and after picking your stock be confident in your stock pick. Stay invested for long term. Do not loose hope in your stock even if the market crashes. A stock with future potential can even go upwards in the falling market.

10 Mistakes That Causes You To Lose Money In Stock Market

There are many mistakes which cause people to lose money in equities but here are some important and most common ones :

1. Lack of knowledge : Most people don't have sufficient knowledge or should I say basic knowledge about the market. They trade because either they have been advised by someone or because they have done their own incomplete research. Most common example of own research which I found is that often people feel that price of a particular stock has fallen so much from its high that now its like a gold mine. People invest heavily in these stocks without finding out why the stock price had fallen and the final outcome is a disaster. Stock market never forgives and has no emotions.
2. Overconfidence : It is not necessary that once your research has brought you gains then same would happen again. People who are new in this field often get overconfident after tasting success once. They increase their investment greatly without calculating personal risk appetite. Loss occured under such circumstances is huge and normally dries their savings. 
3. Running after a stock : I personally know so many guys ho have lost money because they were chasing a stock. A perfect example is stock of Ackruti city in the year 2008/2009. This stock was running upside even when whole market was heading towards a new low. It was at 600 in Dec 08 and in March 09 it was at 2350. You must be thinking what if i had bought this stock. Well don't worry if you did not buy this stock because those who did not sell it had to see a price of 330 in next month. Most of the people could not get out of this stock as it was hitting lower circuit day after day. Imagine what if you had bought it at 1000 when the stock was going up and was waiting for it to cross 2500 mark. Even if you had bought it at 600 when the stock had already fallen from its high you would have made huge loss. So running after a stock when its going down should also be avoided untill you have done proper research on the stock.
4. Portfolio not diversified : If you have invested all your money in a single stock or sector or a mutual fund then you are at a great risk of losing money. If your stock goes down due to any reason or the sector in which you are heavily invested then you will be have no other stock/sector to provide much needed support. Often people don't understand how to diversify and importance of risk management and they invest in sectors or stocks which are not suitable to them. 
5. Fear and greed : Fear and greed are two forces that drive the market. Fear will make you sell at a loss or at a lesser profit and greed will make you hold it a little longer till the stock tumbles or will make you invest heavily in a particular company. So keep your emotions away when you trade.
6. Over-indulgence : Over-indulgence must be avoided. There are too many experts in the market, it is advisable to think before you act. Advices keep on changing daily. Changing your portfolio every now and then on the basis of these advices is not at all recommended. Many brokers offer a lot of advice. The reason is that they earn on every stock, when bought and also when sold. More you trade more they earn.
7. Futures and options : Trading in futures and options without proper knowledge can sometimes be your last trade. Every year thousands of people exit stock market forever after suffering heavy loss by trading in futures and options. It is very very important that you understand every aspect of it before trying. It is widely known that many rich men became poor overnight because they were trading in futures and not in cash. Its actually better to go at your broker's office and learn from other's mistakes who trade in futures and options. Do not trade in futures and options if you are new to the market. In the beginning it appears that you can make a good fortune out of it. You might also earn when you start. But if you don't have proper understanding about trading in futures and options then its alsmost certain that someday you will end up losing money from your pocket. My friend once spoke very funny but sensible words " If you trade in Futures you will ruin your future".
8. Investing by taking loan : NEVER ever take a loan and invest your money in the stock market. An experienced person will never advise you of that.
9. Following others advice : A new trader thinks that all he needs to do is switch on the television and just note down some expert advice on the stocks. If it was so easy then I would'nt be writing this article and you would'nt be continuing your job. Some people take advice from anybody, these may be friends, relatives or even an unknown person. They don't seem to understand that the origin of some of these advices are just a rumour which passes from one person to another.
10. Non-stop buying : Some people just buy stocks no matter what the situation is. If the stock price falls by 15 % they buy. Then whent it falls by 20 % they again buy and regularly do it till the stock has fallen considerably. Later they notice only one trend and that is downwards. These people either get stuck in that stock for a very long time or book heavy losses. So it better to find out the reason of decline instead of rushing to buy. 

An Introduction To The Stock Market: PART-2

What is ' BULL market ' and ' BEAR market ' ?
An extended period of time when majority of investors are buying stocks and the stock prices are rising is referred to as a ' Bull Market '. An extended period of time when majority of investors are selling stocks and the stock prices are falling is considered a ' Bear Market '. 
What is dividend and bonus shares ?
' Dividend ' is the portion of company's profits which is paid out to its shareholders ( remember if you own a share of a company then you are legally associated with its profits and losses ). So if you own more shares then you get more money in the form of dividends. The amount of the dividend is decided by the board of directors of the company. So suppose SBI informs that it is paying dividend of 10 rupees per share and you hold 500 shares of SBI. Then after a pre-decided record date you will get 5000 rupees ( 500 * 10 = 5000 ). Also the price of its share will be adjusted accordingly and will drop by 10 rupees. Similarly ' Bonus shares ' means dividend paid to shareholders in the form of shares. Sometimes a company is not in a position to pay dividend in the form of cash. So it issues bonus shares to its share holders. One of the reason why this happens is due to unsatisfactory cash position of the company. The number of the bonus shares is decided by the board of directors of the company. Now consider you have 500 shares of SBI at current market price of 1000 rupees per share. Now SBI announces bonus shares at a ratio of 1 : 1 ( it means 1 share free for every one share held ). Then after a pre-decided record date you will get 500 extra shares. Also the price of its share will be adjusted accordingly and will become 500 rupees per share. So now you will have 1000 shares of SBI at a price of 500 each. But if a company has some expansion plans or some other reason, it can decide not to issue bonus shares and/or dividends instead of huge profits. In such a situation, the company keeps large cash position with itself for future investment and the price of share is not adjusted.
Why are stocks categorized in different sectors ?
There are so many companies which offer different kind of products or services. E.g. SBI is a bank, INFOSYS is an IT company, DLF is a real estate and infrastructure company etc. These companies are categorized in different sectors according to their business. This way its for everyone to know the basic business of any company and compare it among other competing companies.
What kind of stock broker should I choose ?
To buy shares you should have a broker who will buy shares on your behalf. Since we are in an era of internet it is advisable to choose a broker which provides facility to trade via internet. A broker should be well established in this field, should have a good team of research analysts to provide you with good stock buying tips and should be the one who charges less brokerage fees. This fees is charged by the broker whenever you make a transaction i.e. buy or sell.
How to find out profit making stocks ?
Finding out good stocks is not an easy thing to do. But there are some useful points which should be considered before choosing a stock. These are :                            
1. The company should be among the leaders in its group.
2. The company should be under good & smart management.
3. The company must have a strong brand value.
4. It should promote innovative ideas and technology for the future.
5. The amount of debt should be very small for a company. ( Debt-equity ratio not more than 0.5 )
6. The owners must have a high stake ( at least 30 % ) in the company.
7. The company must have expansion plans for the future.
8. The company must have a solid and scam free background.
9. The company must have sufficient cash reserves for future investment.
10. It should have high profit margins as compared to its competition.
11. The company must be growing at a good pace.
12. It should have a higher average return ( at least 15 % on equity).

Read : How To Identify A Multibagger Stock ?                                            
It may seem very difficult to find good stocks which meet all the above criteria but actually its not. Its just a matter of doing proper research. These days internet offers so many websites by the help of which it easy to carry out a research. All the information mentioned earlier can be found in the annual report of a company and its profiles. But to actually be able to carry out a research you must have good knowledge and understanding of the stock market and for that you must trade. Remember, no matter how much somebody explains still you cannot learn how to drive a car unless you actually sit on the driver's seat and drive it. So research and research more because the main reason why people lose money in the markets is because they don’t carry out proper research before investing. Some people say that investing in the stock market is like gambling but if you carry out a proper research then I am sure that you will earn handsome profits.

Read : 10 Mistakes That Causes You To Lose Money In Stock Market                                  

An Introduction To The Stock Market: PART-1

If you have ever asked what is Stock market but could never get a satisfying answer then don't worry as now your prayers are going to be answered.

What is a Stock ?                        
In simple words a stock represents ownership of a company’s assets and profits and to be associated with its losses and liabilities. Each stock has a stock symbol. e.g. Reliance Industries Limited has a symbol ' RIL ' . This symbol is used in the stock market instead of full name of a company. When a channel related to stock market is selected on a television we see these stock symbols scrolling at the bottom of the television screen.
What is a Share ?                        
Share of a company represents ownership of it. Total no. of shares you have represents total amount of ownership you hold in that company.
What is an IPO ?                        
Now what is an IPO ( Initial Public Offering ) ? To explain this let's consider a company ( worth 600 crores but not listed in stock market ) wants some money to expand its business. So in order to raise this money or funds either it can take a loan or can sell some percentage of its business and receive cash in return. Suppose it decides not to take a loan and sell some of its stake. Now if the company calculates to sell 25% of its business to meet its fund requirements then it needs a buyer for that. We know that 25% of 600 crores is 150 crores. But it is not easy to immediately find a buyer who can invest 150 crores in a company's business.  So the company decides to break this 150 crores into 15000000 ( 150 lacs ) parts, these parts are called shares. So price of each share becomes 100 rupees ( 150 crores divided by 150 lacs = 100 ). Now with this break up of 150 lacs shares of 100 rupees each it is easy to get buyers who don't have to spend all 150 crores. But its not easy to find so may investors who could altogether buy all 150 lac shares. So to solve this problem the company decides to go to the public and issue an IPO. This means that now shares of this company can be bought and this company will be listed in the stock exchange.
What is stock exchange and what is the use of stock exchange ?
A stock exchange is an organised marketplace where shares of a company can be bought and sold legally. It is regulated under the laws of the government. The advantage of a stock exchange is that buyers and sellers are connected electronically without the company of the stock taking any trouble for it. The stocks can be bought and sold with the blink of an eye. For buying stocks no training or degree is required. A person with some money, passport sizes photos, address proof, a bank account, a demat account and a PAN card can buy stocks.
What are the timings of Indian Stock market  ?
Market Opens at  : 09:00 hours ( From Monday to Friday except holidays ) Market Closes at  : 15:30 hours ( From Monday to Friday except holidays ).
How can one make money from stock market ?
Actually there are two ways to do so. We all know that the price of a share continuously swings ( almost every second ) and this is the feature that allows us to earn profits. One way is by buying shares at a low price and selling when they are at a higher price. The second way is by first selling shares at a high price and then later buying at a lower price -- it's called short selling. The second method involves a lot of risk, so for the beginners its advisable to forget the second one and concentrate on the first. As a company grows and becomes more and more profitable the share prices of the company also increase. However, it takes time for a company to grow. That's why for higher returns it is advised to choose a good company and remain invested for long term .
Why does stock prices swing so much ?
To understand this let us consider two cases :
Case 1 - There is only one shop in the city which sells apples. Now when everyone comes to know about it they all go to the shop to purchase apples. The shop is flooded with buyers & shopkeeper being a smart guy increases the price of an apple from 50 rupees per kg to 60 rupees per kg. But still he finds huge number of buyers flooding his shop. The reason is because no other shop is available for the buyers, so they are willing to pay extra. He again decides to raise the price to 70 rupees per kg. Now he notices that the number of buyers have reduced but still they are too many for him to handle. He again increases the price and continues to do so till he feels that the number of buyers are now reduced to a level which he can handle. 
Case 2 - There are many shops on a street which sell apples. The cost of apples in all the shops is 50 rupees per kg. One of the shopkeeper notices that no buyer comes to buy apples from his shop. He feels that if the things continue same way then he might have to stop his business.  Now this shopkeeper displays a board which says apples at 40 rupees per kg. He finds some buyers in his shop but still he wants more buyers as the apples might rot after few days. Now he starts selling apples at 30 rupees per kg. Now he finds that all his apples are sold and none have gone waste.  In first case the price of apples increased because of huge demand and less supply. But in the second case the price had to be reduced because there was little or no demand and the supply was abundant. The same thing happens in the stock market where instead of apples the shares are being purchased and sold .
Where does this supply and demand come from ?
Demand comes from the investors who are willing to buy a stock. When a investor thinks that a stock is worth more than the current price then he is willing to pay extra to get it. This normally happens when a company is expected to report better profits, when a company reports to have huge expansion plans, when analysts suggest positive upmove for the stock or when there are news that some large company is going to buy stake in their company etc. The demand also arises when the stock prices have fallen a lot and there are not many people willing to sell their stocks at such low prices -- this condition is called oversold. Supply comes from the investors who are willing to sell their stocks. If they think that value of a stock is going to reduce more than the current market price then they are willing to sell it for less than current market price. This happens when a company reports loss or lesser profits or if there are doubts about company's business plans. The supply also arises when the stock has jumped a lot and there are not many buyers at the current high price -- this condition is called overbought. 
When does a company reports its earnings ?
All companies listed in the stock exchange have to report their earnings four times a year. This quarterly report is given every three months. Each set of three months is together called ' quarter '. Thus there are 4 quarters in a financial year.
What is ' SENSEX ' and ' NIFTY ' ?
The SENSEX includes thirty blue-chip stocks such as Reliance Industries Ltd, ITC, SBI, L&T etc. It is an average of these thirty blue-chip stocks. These are big well-established companies and are considered to be pioneers in their sectors. If the SENSEX rises then it's considered that the economy is doing good. But when it falls, it is considered that the economy is not doing so well. Similarly NIFTY is an average of 50 blue-chip companies. BSE Midcap index, BSE Smallcap index, BSE BANKEX - Banking Index etc. are some of the other indexes but SENSEX and NIFTY are the ones which are widely followed.
Read: An Introduction To The Stock Market: PART-2

Child Mutual Fund Vs Child ULIP

Features That Your Child Plan Must Have…

There are many child plans in the market and each claims to be better than the other. In this scenario choosing a child plan can be a confusing job. Here are some important points which must be considered before choosing one for your child :

1. Chose a child plan only when your term of investment is at least 10 years otherwise the returns will be lower.                            

2. Make sure that insurance cover is on the parent and not on the child. Plans which have insurance cover on the child must be avoided.              
            
3. Your plan must include ' Waiver of Premium ' benefit. ' WoP ' or ' Waiver of Premium ' means that in case of death of the parent all future premium payments will be discontinued but the maturity value will be paid out as decided by the parent.                            

4. If the parent does not wish to have an insurance cover then child mutual funds must be considered. Also note that unlike ULIPs returns on mutual funds are tax free if invested for long term ( more than 1 year ).
Read - Child Mutual Fund Vs Child ULIP

What Are The Benefits Of Child ULIP

With the rise in cost of education parents are left with no other choice than to look for an investment option which could take care of their child's education and marriage. Investing in a child ULIP can be a good option to secure your child's future . Here are some benefits of a Child ULIP.

1. The plan allows investment in debt and equity together. This will reduce risk associated with investing only in equities and will also provide better returns than a debt fund. However, you can chose to invest maximum amount in equities.                            

2. If you expect the market to fall then you can to switch over to debt funds within the same plan to avoid equity related threats.                            

3. Payment of premium can be stopped after the lock-in period. But in this case returns will be very less.
                          
4. It provides insurance to the parent. In case of demise of the parent The sum assured is paid to the nominee.


5. In case of demise of the parent all future premium payments will be discontinued but the maturity value will be paid out as decided by the parent.
                           
6. Partial withdrawal can be made from time to time.        
                  
7. Sum assured can be chosen by the parent. Returns will be higher if sum assured is reduced. 

A child ULIP seems to be a good option but it should not be used for a period of less than 8 years. For short term profits are less due to higher cot of charges. Longer the period of investment better are the expected returns on your investment.
Read - Features That Your Child Plan Must Have…

You Need At Least 70 Lac For Your Child

I know this may come as a surprise to a lot of readers but on the basis of simple calculation more than 70 lacs will be required to secure future of a single child.  To find out the real reason behind it just check out the below table. Here we have considered 7.5% average rate of inflation for next 21 years and age of the child - 3 years. 

Here it is important to note that expected amount for the future can vary for an individual, depending upon many factors. These can be :                                                               

 1. Age of your child.                            
 2. Type of degree for graduation or post-graduation.                            
 3. College in which your child studies.                            
 4. Average inflation rate.                            
 5. Child's marriage depends upon your future financial status, love or arrange marriage etc.

Considering above factors you can calculate expected future amount for your child.

Read - Common Formulas Used In Investments

To arrive at such a large corpus you must start investing now. Do not worry if your monthly savings are less than the required investment. Invest whatever amount you can. Remember as your income increases your investment can also increase.

Read - What Are The Benefits Of Child ULIP