In placing an order with online investment brokerage platforms like Zerodha, Upstox, or Groww, you – the investor – give instructions to the broker about what you want them to do with your money. When the instruction is fulfilled, your order gets placed and executed in the stock exchange. 

You can place an order in the two stock exchanges of India, which are the National Stock Exchange (NSE) and the Bombay Stock Exchange. If a company’s stock you are interested in buying is listed on both of these exchanges, you can choose the trade as per your preference.

Now, there are two types of effective order options available in the market to reduce your loss possibilities in an investment. Let’s explore what they are.

Stop Loss Orders

A stop-loss order is a buy or sell order you can place if you are concerned that the price of a share could be unfavourable to you. For example, if you buy stock for Rs. 100 and want to limit the loss at Rs. 95, you can register an order in the system for the stock’s sale just when it reaches 95. This order type is called ‘Stop Loss’, as you are placing it to stop a loss more than what you are ready to risk.

• • Trigger price: It is the price set by you at which your share goes to exchange to get traded.

  • Exit price or limit price: It is the price set by you at which the trade of your share gets executed.

There are many ways to invest. You can invest in gold, real estate, land holdings, and others. But these traditional methods are restrictive as investors need an already established financial buildup for them. As a new and aspiring investor, you can acquire a good position in the financial world of bonds, stocks, and other security holdings.

While the financial markets have many entities for you to learn, understand, and trade, the two primary entities are stocks and bonds. So let’s know what they are and how they can end in different results for your investments.

Bonds

Bonds are a type of loan that the buyers of bonds provide to companies or governments issuing them. When you buy bonds, the company or the government pays you interest on the number of bonds you purchase for a predetermined period. The total amount of the bonds purchased is also paid at the end.

For example, If you buy a bond for Rs. 2,500 and get an annual interest rate of 2% over ten years, you will receive Rs. 50 in interest per annum, which will be evenly dispersed throughout the term of bonds. After ten years, you will earn Rs. 500 in interest and recover the original investment of Rs. 2,500.

Today, companies view the public offering as one of the most effective ways to raise funds and plan an exit strategy. Established companies go public to raise large sums of money to fund their expansion plans, and start-ups that have built their brand to the limit see this as a good exit strategy.

However, a firm has to go through many nuances of the public offering process and numerous phases before going public. Let’s see what they are.

Pre-IPO (Pre-initial Public Offering) 

Pre-IPO is a stage for a company when it puts shares up for private sale as a last measure to raise capital before it goes public. By introducing more funds, the private company adopts a matured outlook and prepares itself better for going public.

Pre-IPO shares can only be bought by professional investors, high net worth individuals, venture capitalists, private companies, and corporate insiders such as company founders and employees.

Investors invest in private companies a few months or one year before the IPO registration in the pre-IPO phase. This also means that the more significant risks are associated with pre-IPO transactions than with actual IPOs. 

Moreover, it is not easy to objectively estimate the value of shares at the pre-IPO stage because a privately held company, unlike a public one, does not disclose financial statements.

Payments from a company to its shareholders and partners are termed dividends. When you receive dividends, you get a share of the company’s profits in sales. This entire process aims to increase the company’s value, which also proliferates your portfolio’s investment growth. 

What is a dividend?

The dividend is a section of a company’s profit income that is distributed to its shareholders. Some established companies disburse most of their annual profits annually among investors to establish goodwill in the market.

A company’s dividend strategy is considered proof of its belief in the model of growth and continuity. A good dividend is a significant indicator of reliability and helps ensure reasonable stock prices for the future.

If you choose to invest in shareholdings or mutual funds, you have to decide several paths for such an initiative. But, one of the most crucial features is to choose between a fund with a dividend reinvestment option and a fund with a growth option. 

Dividend reinvestment

A dividend investment program (DRIP) is a programme that allows investors to reinvest cash dividends in additional or fractions of the underlying stocks when the premium is paid.

Profits are no doubt vital to the growth of any company, but some of the biggest names in business are yet to make money. This being the backdrop, does profit still matter? Well, it does, then why do investors invest in a loss-making company? Chinmay Ananda has elucidated on this question in MentorED, our weekly live 30-minute workshop where industry veterans share their knowledge and experience and discuss topics that are apt and relevant to the start-up and small business fraternity.

Chinmay Ananda is a Financial Educator, Business Storyteller, Speaker, Author and Investor. He has trained and consulted over 950 business owners in Australia, India, China and Indonesia, and teaches in top business schools like the Royal Melbourne Institute of Technology (RMIT), Torrens University, University of New England and Insight Academy of Entrepreneurship in Australia. Ananda also conducts monthly webinars for indianstartups.com that has 100,000+ members. He also mentors start-ups and is active in the Venture Capital ecosystem. In 2016, he was awarded the prestigious Kerrie Nairn Scholarship for his public speaking skills.

Playing the high-risk game

Chinmay Ananda initiated the workshop by asking a question to the audience, “Why do you think investors invest?” Although many may opine different views altogether, it is worthwhile to have a measurable answer. Thereafter from his illustrious story of purchasing his motorcycle which later proved to change his own mindset in investment, he answered, “Investors invest if you make them believe that you can help them make more money with their money than they would have done with their own money.”

Book: FUNdamentals of Financial Statements

Author: Chinmay Ananda

Published by: Zaang Publications/Finance Academy, Australia

Year of publication: 2015

I have got the chance to read many articles and books on finance and financial statements written to educate non-finance executives and entrepreneurs in the finance domain. I have written a few articles in this genre. So, when I picked up Chinmay Ananda’s book ‘Fundamentals of Financial Statements’ to read I thought it to be another book in the same category targeting the same type of readers. But I was taken by surprise.

The cover, page layout and the style of the book give a feel of simplicity and the initial thought that would come to the reader’s mind is of mediocrity. After finishing this book, I felt that this book could be a good read even for finance professionals. Take a look at the way the difference between Asset and Expense or between Liability and Income or between the items coming to Profit and Loss and Balance Sheet are explained. Here is an example from the book – “If any purchase is consumed before the Balance Sheet date it becomes expense in the Profit and Loss statement and if it is not consumed before the Balance Sheet date it becomes Asset in Balance Sheet.” Beautifully articulated!

However, the book is written by Chinmay with non-finance readers in mind and it does full justice to its purpose and objective. Like the FUN in capitals in the word fundamentals of the title manifests, it is fun to read this book and understand how to read financial statements. It is a book on finance that even a non-finance person who hates finance and numbers will love to read till the end. More importantly, the book will tempt you to explore more about finance and financial statements.

What does it mean by Turnover and Profit?

As the saying goes: turnover is vanity, profit is sanity and cash flow is reality. This is a meaningful statement through not wanting to conclude so at the outset itself.

At the most basic level, turnover is the total sales revenue that a business generates over a specific period. Profit is the amount of money remaining or leftover after deducting its costs for the same period. In simple terms, the turnover is the top-line, and the profit is the bottom-line of a profit and loss or income statement.

Of course, the picture is not quite so straightforward. We come across various types of profit in financial reports and related articles, each of which you calculate by deducting certain categories or groups of costs. The analogy above describes net profit which, generally speaking, removes all costs.

Here again, we see PBT which is profit before tax and PAT which is profit after tax. A business will also measure its gross profit, an important measurement by deducting the cost of goods sold (cogs) or cost of sales from the sales revenue, and sometimes exotic metrics such as the EBITDA which is earnings before interest, tax, depreciation and amortisation. Operating profit, also known as EBIT – earnings before interest and tax- is the business’s profit, excluding any deductions you’d normally make for interest and taxes but after deducting depreciation and amortisation.