Equity Investing
Pointers for a Lay Man
Investing is a must exercise for
everybody looking at the growing rate of inflation and ever-expanding demands
of family and society standards. Everybody is making an effort to uplift
standards of living, which in a way is a good sign but it is a daunting task
for those bread earners who put in hard-work and long-working hours to make
sure that their family has a comfortable and secured life.
Investments are essential for
securing your retired life as well as to meet contingency requirements. As it
is known in common parlance there are several vehicles of investment and there
are several instruments available to invest i.e. Bonds, Equity Shares,
Debentures, Saving Certificates and Fixed Deposits.
Most of the Investments could be
categorized into either Debt (loan resulting into interest receipt and
principal payment) or Equity (risk based, ownership based resulting into
capital or value appreciation). An individual investor could make or select any
type of investment depending upon his or her risk preference (high risk VS. low
risk) or ability to invest (amount of money)and preference for being invested
(time horizon). To understand the basic premise let us take an example –
Ms. A could invest $ 10,000 for 5 years in a 5 year bond, as she wanted
to take less-risk and could easily do away with $10,000 for 5 years as there is
no evident need for her to use that money. Whereas Ms. B has invested $100,000
in equity shares, she wants more returns by taking higher risk and she has not
time frame in mind as she has sufficient income and liquidity (availability of
cash) to meet all her present and future requirements.
The above example helps to put some light on basic
investment philosophy. This article focuses primarily in Equity investments or
stocks as some call them. We need to clarify one thing about investments in
equity, that they cannot be termed or considered as your savings though they
might have been taken from your savings or may be from your current income or
cash flow but the equity investments are neither savings nor similar to
savings. Up to extent money parked into your debt instruments or fixed deposits
could be considered as savings as it is almost cash like or cash equivalent, could
be easily converted into cash as and when needed. The quick conversion to cash
or being a cash equivalent both features are non-existent in equity
investments.
Undeniably some products are available in the market that
prompts you to invest your savings into equity but the product in itself is
risky and associated with changes in value (value might go up or down) of the
investment (product or asset). We do not expect value of our savings to go
down!
Starting with General Guidelines for a beginner, following
are the few tips to be kept in mind so you can make some educated decision
whether the equity investments are for you or not.
1.
Do you have capacity to lose money! Sorry but
there are chances that you might end up losing some money on your investment as
the equity prices could not be controlled as the rate of interest on your
savings account.
2.
Your capacity to take risk or appetite for risk
– If you can invest some money and just wait and actively monitor the situation
without withdrawing the funds then only consider parking your money into
equity. Plus make sure the negative changes in the value of your investment do
not have significant impact on your behavior or financial position.
3.
Could you manage your investment actively and
ready to do some research – if you have time and you can be proactive in
managing your money than only equity investments are for you otherwise debt
makes more sense. Undeniably you can use mutual funds but still you need to
manage your money or have information to select most appropriate mutual fund or
switch between the schemes or securities.
4.
Long Term – The term or the time-frame is the
key to generate value in equity investments so you should have the capacity to
lock in you money for at least 5 years, remember that may generate some tax
advantage for you as well. Remember to set long-term goals and how your
investments in equity should work so the goals could be realized effectively.
5.
Make yourself aware of Dos and Don’ts of the
stock market. Reading is the Key! Avoid picking scrips or companies to invest
based upon emotions or hunches. Another Important Don’t is not to take a loan
to invest in stock market (equity investment). Make a point to diversify your
portfolio by buying good quality stocks of different companies ranging over
different sectors or industries. Stocks should be bought from banking sector,
IT sector, Telecom, Infrastructure and FMCG.
Pointers to Make an Investment in Equity:
If you have read so much and have
reached to this stage than it means you are serious ready to invest in equity.
There are several jargons and terminology i.e. Fundamental Analysis, Technical
Analysis, Economic Analysis and Dow Theory etc., that are being used and some
of them seems to be bit complicated rather high-end for a lay man to use.
Here an Effort has been made to
provide you simplistic pointers that can facilitate you in making right
selection for your equity investment portfolio. Most of this information could
be collected via websites or stock exchange apps or may be via magazines or
journals. This information is primarily available in public domain.
Following is the information or
pointers that you should try to study or find out information about them so you
can make a well judged investment.
1.
History of the Company – Past is always a
Guiding Force as it tells a lot about how the company has progressed over a
period of time.
2.
Basic Understanding of the Company’s Business –
Invest if you understand the company’s business and the product of the company
seems to be in the demand for a long-period.
3.
Reputation and Experience of the promoters and
Board of directors
4.
Customers and Type of Markets being served by
the company – Loyal Customers and International Customers is an asset.
5.
High & Low price of a Year or at least for
last 6 months – Newer Buy at the peak price try to buy as close as possible to
the lowest price
6.
Revenue of the Company for last 5 years – It will
give you an idea how much company makes in a year and its capacity to generate
income. You could also do year –on – year comparison.
7.
Net Profit after Tax for last 5 years – This is
what will be distributed to the shareholders as earnings per share (EPS)
8.
P/E Ratio – Price Earning Ration in simple words
it means current market price per share divided by Earning per Share. E.g. Stock
is trading at INR 100 and Earning per share last year has been INR 5 then P/E
ratio is 100/5= INR 20/-
9.
Competitions for the Company – More Competition
more are the challenges that the company has to face in the market.
10.
Focus on the Future of the Company – Vision that
the company holds for the future and concrete planning for growth.
