Share Trading

Shares are probably the most popular choice of investment because of its simplicity compared to other forms of investments.

A single share represents a partial ownership of a company. So, when you purchase a stock, you actually purchasing partial ownership of that particular corporation that stock represents. For an example, if you have purchased 5000 shares and the 100 % of that company is made up of 100,000 issued shares, then you own 5% of that company.

Each share represents an ownership of the company’s assets, and a claim on the company’s earnings, it produces during a specific period, such as quarterly or annually.

Becoming a shareholder comes with certain rights, one of them is the voting rights. Each share gives the right to vote on selected company decisions. The more shares you own, the more sway you will have in that company’s decisions.

The earnings are generally reported as earnings per share (EPS). The company can reinvest the earnings back into the company’s operations which is called retained earnings or paid as dividend to the shareholders or combination of both. The dividend is paid per share basis, so the total income an investor can earn as dividend is number of shares multiplied by the value of dividend per share.

In general terms stock markets are volatile due to political, regulatory, market sentiment, or economic climate. Investing in shares comes with some level of risk but in general investing in blue-chip company shares comparatively much lower risk than smaller companies or younger companies. Fast-growing or younger companies tends to retain all of their earnings. When investing in blue-chip companies, more likely could get a regular dividend payout and to protect the share value, could implement hedging strategies using Options market.

Growth Stocks

There are two main style of investing in stock-market. Only one type can be the leading performer at any given time. Sometimes the value stocks outperform, and the other times growth stocks outperform. Typically, earnings per share and revenue per share defines growth stocks. Rising earnings and revenues are the distinctive characteristics of growth stocks. Analysts consider as a common rule for a growth stock that if the Price to Earnings Ratio is above 20, and/or the Price to Book Value Ratio is above 3.0.

Price to Earnings Ratio (P / E)

A company’s share price divided by earnings per share. The length of time period considered for the earnings per share could be the past 12 months or on the projected period for the company. The latter one is called Forward P/ E .

Price to Book Value Ratio (P / B)

The share price divided by the stated value of its net assets. The net asset is calculated as total assets minus intangible assets and liabilities.

Since the actual future growth rate of earnings for a share cannot be guaranteed, the higher Price to Earning and Price to Book Value Ratios define the growth. These ratios will become higher in the event of higher growth rate because investors might become tempted to pay more for a share.

Generally speaking, the growth stocks appear in the fast-growing industries like pharmaceuticals and technology.

Value Stocks

Value stocks have lower Price to Earnings and Price to Book Value ratios compared to Growth stocks. They have lower expected growth rate.

Generally speaking, the value stocks show in the industries such as financial sector, manufacturing and commodity producers.

Choosing a good mix of growth and value stocks can diversify a portfolio.

How to Choose Between Growth and Value 

Deciding between growth and value stock, comes down to the investor’s objective. In general terms the investments should match the investor’s objective.

The risk tolerance, investment objectives and the investment horizon influence the style of investing.

Choosing a good mix of growth and value stocks can diversify a portfolio.

Generating Potential Income Stream

Companies with long history of dividends payout and good dividend growth should be considered for generating a potential income stream. These companies are usually well established, and their shares are priced for value.

Long Term Investment

Often high-growth companies experience higher volatility because they may
be more sensitive to short-term market dynamics. This market effect could be neutralised by having a longer investment horizon, for the investment to realise its potential growth.

Stock Split 

It’s a unique opportunity in the market. A type of corporate action where a company’s board of directors decides to divide the company’s outstanding shares. I here, the number of outstanding shares of a company changes but the shareholders’ ownership percentage in the company remains the same. Generally, the board of directors and shareholders must approve for a share split.

Types of Stock Splits

Forward Splits

It increases the outstanding number of shares of a company. Example, in a four-for-one forward share split (4:1), each old share is now equal to four shares. The share price would go down. Example, if the share worth $16 prior to split, then after the share split the share would be worth $4. For a short position on a share, after the forward split the account will get debited, so it will increase in short position.

Reverse splits

It reduces the number of outstanding shares of a company. After the one-to-four reverse share split (1:4) the shareholding of 400 shares of a company, would now be equal to 100 shares. The new share would also increase in price proportionately. If the share was worth $1 prior to the share split, then after the split it would be worth $4. For a short position on a share, the reverse split will credit the account and as a result it will reduce the short position.

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