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| Stock investment for beginners | |
The buoyancy in the stock market is luring first-time investors to explore the option of investing in equities. Here's a guide
With optimism abounding about the prospects of both the economy and the markets, first-time investors are entering the equity markets in droves. But investing in equities can be risky, especially when indices are close to their all-time high levels. Therefore, it is important to learn a thing or two before you enter the stock market.
The equity markets are not a route to quick riches. "Greed and speed are the worst enemies of sound investing. All direct investments in equities should be made with a time horizon of at least 3-5 years. If you ignore this tenet and adopt a high-churn strategy, you will soon come to grief. "You may get lucky on your first punt, but then, inevitably, you will buy something that will keep sinking
The equity markets are not a route to quick riches. Greed and speed are the worst enemies of sound investing. All direct investments in equities should be made with a time horizon of at least 3-5 years. If you ignore this tenet and adopt a high-churn strategy, you will soon come to grief. You may get lucky on your first punt, but then, inevitably , you will buy something that will keep sinking
Before you start investing in stocks, educate yourself about this asset class. Learn the ropes from an unbiased source with no conflict of interest. Many brokerage houses today run short term learning programmes on equity investing. Brokerages earn more when you transact more. Hence, they have a vested interest in teaching strategies that involve a high churn
Invest only what you can afford to lose. It will take about 2-3 years of regular work to get an idea of how to invest in stocks. Any loss incurred should be treated as the cost of learning. Stick to large-caps first First-time investors
should stick to large-cap stocks for two reasons. One, they are less volatile than mid and small-cap stocks. Two, a lot more information is available on largecaps. This minimises the probability of unpleasant surprises. The chances of falling prey to issues like aggressive accounting and cooked books are also lower among these stocks. Develop an exit strategy
Develop a clearly defined sell strategy even before you enter the markets. This decision framework should be based on a mix of fundamentals and valuation. If a stock's fundamentals remain sound but its price has fallen, you should buy more. If the fundamentals have declined while the valuation has run up, you should sell. If the fundamentals remain sound but the valuation has run up, you may perhaps book partial profits, and so on.
Stick to your circle of competence Stick to simple businesses whose functioning you can understand easily. The business should also ideally have a consistent operating history.
Warren Buffett avoids tech stocks where today's leader is soon replaced by another. Stick to companies whose products and services will not become obsolete anytime soon. He cites the example of Nokia, a good business that has today been overtaken by Samsung and Apple. Businesses like banking will not change much in the next 20-30 years,.
Invest in companies with moats Buy-and-hold type investors should select companies that enjoy sustainable competitive advantages. If a company enjoys outsized profits, a number of competitors enter the field and drive down profits. However, some companies manage to remain highly profitable for a long time because they have a strong competitive advantage over rivals. Opt for quality management
Watch out for management that doesn't act in the best interests of minority shareholders. Check the announcements made three-four years earlier by the management to see whether it has managed to bring those plans to fruition. This will give you an idea of its execution skills.
You should look up Sebi's website and trawl the Internet for bad news on promoters. He suggests avoiding companies where the promoter holding is less than 30%.
Don't invest in high-debt companies
When the economy is expanding, companies tend to overstretch themselves. Some take on more projects than they can handle. Others undertake costly acquisitions funded by debt. If the economy turns, the company's revenue may plummet, but the interest on debt will have to be paid. This can severely dent its bottom line. The debt:equity ratio and the interest coverage ratio are two parameters that indicate the degree of leverage. Buy at the right valuation
Usually retail investors enter the markets when they are at a high and valuations have already become stretched. Remember that the higher a stock's valuation, the lower the prospective returns from it. Study stocks and build a list of the ones you would like to buy. Work out the price points at which you would like to buy those stocks. Then wait patiently for prices to reach those levels.
Bear in mind that the stock that is cheap is not necessarily valuable.
It is better to pay a reasonable price for a quality business than a low price for a poor-quality business.
Measure your returns Finally, be diligent about benchmarking your performance either against a broad market index or the category average returns of mutual funds. If after a year or two, you find that your direct stock portfolio has failed to match these yardsticks, you would be better off taking the fund route. Use portfolio trackers available on Indian financial websites.
>First-time investors should avoid them for the simple reason that less information is available about these companies than about players which have been listed on the bourses for over 5-10 years. Besides, when the sentiment on the street is upbeat, promoters tend to price their IPOs expensively.
Chosen well, stocks can be a rewarding investment. Observe the comprehensive list of dos and don'ts listed above and your foray into the stock markets should be both safe and profitable.
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