Posted in Finance Articles, Total Reads: 6208
, Published on 14 September 2011
Prices of useful items are ever increasing. But does our income also increase at the same rate? Are our savings sufficient enough to take care of our future expenses? Most of us will have a negative response to these questions. So, how does one prepare himself for these known as well as unknown future expenditures? The answer is by investing. There are a number of investment options available. In a country like India, people invest in gold, silver, post-office savings, term deposits etc. The major factor that one must consider before investing is return. The return should be more than the rate of inflation otherwise there is no point of making such an investment.
There is a theory which says that to get more return, you have take more risk. One of the major investing hub, which is not so popular in India, is the stock market. There is a belief regarding them that they are a ground for gambling. This ideology is actually a misconception. If the investor follows some basic principles, the chances of failure are reduced to a large extent.
The return which a person can get in a stock market can be very very high. It made Azeem Premji a very wealthy person when Wipro’s share went high in the late 90s. It can even reduce the wealth of the promoter which is recently been seen by Vijay Mallya where Kingfisher’s shares are exceedingly low. So how does a normal person like you and me invest in stock market given its huge volatility? Here again, it depends upon the type of return the person wants from his investment. Remember, largest returns come from taking the biggest risk. But, failing there can bring huge losses which we as small or medium investors can not afford to take.
Most of the people nowadays have a bank account. When we enter the branch of any bank, there is a customer relationship manager there. This person can be of big help if we consider taking the help of bank for our investments. The bank gives its customers a manager depending upon the investment size of the customer. This person takes care of customer’s investments though not completely. The customer has to agree to the investment options given by the manager. So, again we fall back on the same question that how do we choose where to invest?
When a person wishes to invest in stocks, he should keep an eye on the news that goes around the stock market. From such information, he can get a fair idea which companies are performing well. Even the stock exchange has a list of top 50 or top 30 companies. When the person gets a fair idea about the companies, he should then look at the past years (2-3 years) balance sheet and see whether the company is performing well or not. Then, he should also look at the stock price curve of the company. If the curve has been consistent, he should make an investment in the company. When a person invests, he should make sure that he is not investing all his money in a single firm. This is because, if the stocks fall, all the money will be lost. Even investing in the same sector (airline, petroleum) should be avoided due to the same reason. The portfolio of the person should be diversified. There should be investments across many sectors and firms. This reduces the risk to a great extent.
Still there are a lot of people who do not invest in this fashion. Either they have the good old opinion about stock market or they lack knowledge about investments. For such people, investing in mutual funds is a good option. All the burden of investing is looked after by the MF manager. It informs about all the risks which are associated with the investment. The person just needs to choose the investment portfolio.
Investment in stock market is a risky proposition. It requires that the person be alert and conscious about his investments. Bad times are bound to come when the market will crash. During such phases, the investor needs to be patient and work to minimize the loss. The loss can be minimized by having a pre-decided stop loss limit beyond which if the stock price falls, he should sell. Most of the people keep a stop-loss limit of 85 % i.e. if the market price falls below 85% of purchase price, the stock should be sold without any second thoughts. This is important for people who have limited capacity to bear losses. Turbulent times have little significance for people who wish to invest for a long term (2 years or above). These people buy stocks of market leaders and remain dormant for some time and then sell these to earn profit.
So to conclude, the investor should decide his return, his capacity to bear loss and the time period of investment before investing in stock market.
About the Author - Naman Mathur is student pursuing MBA from NMIMS. He has interests in Finance, Movies, Cricket, Latest Mobiles and supports the anti-corruption movement by Anna Hazare