Yes, the finance industry is the foremost expert on 3 letter acronyms, and IPO is another example. Standing for Initial Public Offering, it basically means offering shares to the public for the first time, usually with a prospectus that details the investment offer.

IPOs are often described as flotation, going public or listing. Prior to an IPO, enterprises that sell shares to investors are considered to be privately held. The IPO allows investors to liquidate some or all of their interest in the particular entity when it becomes a public company.

Selling Stock
An initial public offering, or IPO, is the first sale of stock by a company to the public. A company can raise money by issuing either debt or equity. If the company has never issued equity to the public, it’s known as an IPO.

Companies fall into two broad categories: private and public.
A privately held company has fewer shareholders and its owners don’t have to disclose much information about the company. Anybody can go out and incorporate a company: just put in some money, file the right legal documents and follow the reporting rules of your jurisdiction. Most small businesses are privately held. But large companies can be private too. Did you know that IKEA, Domino’s Pizza and Hallmark Cards are all privately held?

It usually isn’t possible to buy shares in a private company. You can approach the owners about investing, but they’re not obligated to sell you anything, and probably won’t anyway. Public companies, on the other hand, have sold at least a portion of themselves to the public and trade on a stock exchange. This is why doing an IPO is also referred to as “going public.”

This form of investing can be relatively high risk, but at the same time, if you know much about a company looking at an IPO, and you do your due dilligence on the business, it could give you returns far exceeding many other investments in this category. Once again, do your research and never invest in anything you don’t know much about.

That concludes the simple series of investing in shares. There are many websites dedicated to shares and books on investing. Warren buffet has a very down to earth look at investing and it obviously works, considering he is the second richest man in the world by doing this. I hope this series helped you.

PD

One of the reasons shares are bought is to receive an income. Each time the listed company has profits at the end of each year, they pay a share of the profits to their shareholders, which is called a dividend.

I know this is not rocket science for many people, but you would be surprised how many people don’t understand different parts of shares. Wikipedia’s definition of a dividend sums it up quite well:

Dividends are payments made by a corporation to its shareholders. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be paid to the shareholders as a dividend. Many corporations retain a portion of their earnings and pay the remainder as a dividend.

These dividends can be paid franked or unfranked. Franked means that the shares have had the tax paid on the earnings already, and unfranked means the tax hasn’t.

So many people invest in shares, in fact nearly every Australian worker has some form of shares at the moment, through superannuation. If you haven’t gone to the extent of actually purchasing shares yourself, then there are a few things you will need to understand before taking ‘the plunge’.

To help you with the basics of understanding shares, I’ll run a short post series. If you have any feedback or suggestions on what you would like to hear more about, please post a comment below and I’ll post the information for you.If you go to the ASX website, and click on shares to search for a company, you will find the following facts: This first post is about Price Earnings Ratios (P/E ratio).

What Does Price-Earnings Ratio - P/E Ratio Mean?
A valuation ratio of a company’s current share price compared to its per-share earnings.
Calculated as: Price-Earnings Ratio (P/E Ratio)

For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95).

The Eearnings Per Share is usually from the last four quarters (also called trailing P/E), but sometimes it can be taken from the estimates of earnings expected in the next four.

In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn’t tell us the whole story by itself. It’s usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company’s own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects.

The P/E is sometimes referred to as the “multiple”, because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, that would mean that an investor is willing to pay $20 for $1 of  current earnings.

It is important that investors note an important problem that arises with the P/E measure, and to avoid basing a decision on this measure alone. The denominator (earnings) is based on an accounting measure of earnings that is susceptible to forms of manipulation, making the quality of the P/E only as good as the quality of the underlying earnings number.

I hope this post helped you understand the P/E Ratio, and be sure to keep an eye on the next post.

PD

With all forms of investing being hit hard over the past 12-18 months, the more traditional forms of investments are starting to look like they are on the rebound again. They say the market has recovered well before the media ever gets hold of it. So here are 5 things that you need to know before moving into investing. I am not a professional adviser in this area, so if you have technical questions, or need ‘advice’ on investing in particular companies, please consult a professional stockbroker or sharemarket report.

1. You own a part of the business

When you invest in stocks, you do not invest in the market (despite what you think). You invest in the equity shares of a company. That makes you a shareholder; you now own a small part of that business without 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 the losses, if any.

That is why investing in shares is risky. If the company does well, you benefit. If it does not, you lose. There are no guarantees whatsoever.

2. In the short-run, the price of the share can wildly fluctuate

Let’s say the company fixes the price of each share at $10. This is called the face value of the share.

When the share is traded in the stock market, this value may go up or down depending on supply of, and demand for the stock.

If everyone wants to buy the shares, the price will go up. If nobody wants to buy the shares, and many want to sell them, the price will fall. The value of a share in the market at any point of time is called the ‘price of the share’ or the ‘market value of a stock’.

So you might have paid  $15 for a share which is now quoting at $12. Don’t panic and sell. If it is a solid company, the share price should eventually rise.

The prices will get influenced by the market sentiment and the general direction of the market. As a result, you may see short-term slumps.

3. Always invest for the long-term

The best way to make money is to buy low and sell high. This means you should buy the share when the price is low and sell it when it is high.

That is why you must buy in a bear market. This is a term used to describe the sentiment of the stock market when it is low and the prices of shares have generally fallen. The best time to sell is in a bull market, when the sentiment is high and the prices of shares are rising.

But it is very difficult to time the market. In fact, no one can do it. If we could, we would all be millionaires, wouldn’t we? That is why, when you invest in the market, it is best to invest for the long-term. Hold on to your shares for a few years before you think of selling them.

Companies increase their sales and book higher profits over the years. This will eventually reflect in the share price, so ignore the short-term slumps. Once you decide that you are in for the long haul, you can ride over the bear and bull runs with no stress at all. Over time, the price of your shares will appreciate.

4. Decide how much you want to invest

Always remember one basic rule in finance — if something gives you higher returns, that’s usually because it carries a greater risk.

That’s the reason why not-so-good companies will pay you a higher rate of interest for your deposits. The same reasoning goes for stocks too — they give higher returns than, say, bank fixed deposits because they are more risky. So the amount of money you invest in the market depends on your capacity to bear the risk.

If you are young with a steady job, you can invest a larger proportion of your income in the stock market than, say your parents who are close to retirement. If you have a lot of debt to repay, avoid putting too much of your money in stocks.

It’s best to decide how much of your savings you will allocate to stocks, and stick to that plan. Don’t get swayed by how much your friend is investing.

5. Don’t rely solely on ‘good advice’

A smart investor should never invest buy shares of companies he doesn’t know much about. Relying on ‘advice’ from friends is not always a great idea. Do some groundwork yourself.

It doesn’t matter who is buying the stock or who is recommending it. Steer clear of such ways of making a fast buck. These tips will land you in that brown creek with no paddle.

When you hear of a ‘hot tip’, dig further. Take a look at the company’s profit and loss statement, which would have been audited by chartered accountants. Do some basic calculations on your own. The Earnings Per Share (net profit/ number of shares) and Price/Earnings ratio (market price/ EPS) should give you a fair understanding.

These tips should get you started. Tread cautiously though. If stocks intimidate you, consider a diversified equity fund. A mutual fund manager will research many companies before investing in their shares. This way, you can participate in the stock market even as you leave the research to professionals.

PD