If equities tempt you but you are scared to take the plunge during these volatile times, here's a complete step-by-step guide on investing in equities.
Step 1: Understand how the stock market works
When you read you begin with A-B-C. When you sing you begin with Do-Re-Mi. And when you invest in stocks you begin with business-company-shares.
Before you embark on your journey to invest in equities,
teach yourself how the stock market works.Step 2: Learn how to choose a stockHaving understood the markets, it is important to know how to go about selecting a company, a stock and the right price. A little bit of research, some smart diversification and proper monitoring will ensure that things seldom go wrong.
It's not that difficult.
IF you want to invest in equities, there are only four things you need to remember.
1. Choose the right companyLook for superior and profitable growth. The company should earn at least 20% return on its shareholders’ capital. Ideally a long-term investment perspective (more than five years) allows you to participate in the company’s growth. At the short end (3-6 months), share performance is driven more by market sentiment and less by company fundamentals. In the long run, the relevance of the right price diminishes.
2. Be disciplinedStock investing is a long, learning experience. You will make mistakes, but also learn from them. Here is what you can do to ensure a smooth ride.--Diversify your investments. Do not put more than 10% of your corpus in one stock, even if it’s a gem. On the other hand, don’t have too many – they become difficult to monitor. For a passive long long-term investor, 15-20 is a healthy number.
--Research and analyse your company's performance through quarterly results, annual reports and news articles. --Get a good broker and understand settlement systems--Ignore hot tips. If hot tips really worked, we'd all be millionaires. --Resist the temptation to buy more. Each purchase is a new investment decision. Buy only as many shares of one company, as fits your overall allocation plan.
3. Monitor and reviewRegularly monitor and review your investments. Keep in touch with quarterly results announcements and update the prices on your portfolio worksheet at least once a week.
Also, review the reasons you earlier identified for buying a stock and check whether they are still valid or there have been significant changes in your earlier assumptions and expectations. And use an annual review process to review your exposure to equity shares within your overall asset allocation and rebalance, if necessary.
4. Learn from your mistakes When reviewing, do identify and learn from your mistakes. Nothing beats first-hand experience. Let these experiences register as `pearls of wisdom' and help you emerge a smarter equity investor.
Step 3: Decide how much to investSince equities are high risk, high return instruments, how much you should invest would really depend on how much risk you can tolerate.
